K-Bro Linen
Annual Report 2016

Plain-text annual report

2016 A N N U A L R E P O R T WE ARE DEPENDABLE. T A B L E O F C O N T E N T S 1 4 7 13 38 P R E S I D E N T ’ S M E S S A G E C H A I R M A N ’ S M E S S A G E F I N A N C I A L H I G H L I G H T S M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S P R E S I D E N T ’ S M E S S A G E 2016 WAS AN IMPORTANT YEAR IN K-BRO’S HISTORY. Once completed, K-Bro will have a network of large, efficient, and state-of-the-art plants in most of our markets across the country. Often our long-term opportunities have short-term trade-offs, and we will work through transitions to our new plants in 2017 and 2018. While we expect continuing growth in revenue and profitability, we will also incur transition and other one-time costs related to positioning our Company for years of new growth opportunities. We work hard every day to exceed the high expectations of our customers and suppliers, to provide the best possible careers for our employees, and to continue to earn the confidence of our shareholders. Our management team and our nearly 2,000 employees thank you for your continuing support, and we look forward to a successful future. 2016 was an important year in K-Bro’s history. We had solid revenue and EBITDA growth of 10.1% and 4%, and maintained our dividend of $1.20/share. At the same time, we continued to maintain a flexible capital structure in order to capitalize on all of our growth opportunities. We have positioned the Company for significant growth in several of our markets, and expect to reap the benefits of these investments in the years ahead. • • • We fully-transitioned our Saskatchewan volume into our new modern Regina facility, providing us with the capacity to continue to grow our healthcare and hospitality businesses. We completed the transition to our new state-of-the- art Toronto facility during the first quarter 2017, one that will give us tens of millions of pounds of additional capacity at a favorable cost structure. We have recently signed almost $7.6 million in revenue of new business. We are building a large state-of-the-art healthcare plant in Vancouver that will enable us to process tens of millions of pounds of additional volume at a competitive cost structure. We have re-signed a significant amount of our existing Vancouver healthcare volume to new long-term contracts and have been awarded most of the healthcare volume processed by our competitor. We are also investing significant capital to upgrade and modernize our Vancouver hospitality plant. 1 2016 ANNUAL REPORT “ W E W I L L I N V E S T I N O U R S E LV E S & C O N T I N U E T O E V O LV E A B O V E T H E R E S T ” LINDA MCCURDY W E A R E D E P E N D A B L E . 2 2 WE ARE DEPENDABLE.K - B R O I S C A N A D A ’ S L A R G E S T H E A L T H C A R E & H O S P I T A L I T Y L A U N D R Y & L I N E N P R O C E S S O R W I T H F A C I L I T I E S A L L A C R O S S T H E C O U N T R Y. 3 2016 ANNUAL REPORTVictoria Vancouver Calgary Edmonton Regina Toronto Montréal Québec City C H A I R M A N ’ S M E S S A G E WE ARE PLEASED THAT 2016 REPRESENTED ANOTHER YEAR OF GROWTH FOR K-BRO. We are pleased that 2016 represented another year of growth for K-Bro. We are optimistic that we have taken key steps to position the Company for growth in several key markets. 2016 was truly an important year for our Company. The Board of Directors remains dedicated to strong corporate governance and oversight, and to ensuring the Company continues to best position itself for future growth and profitability. I want to thank you for your trust and confidence on behalf of the Company, our 2,000 employees, our executive team, and our Board. We will always work hard to earn your loyalty and trust every day. ROSS SMITH 4 WE ARE DEPENDABLE. O F F I C E R S & D I R E C T O R S K-Bro is the largest healthcare and hospitality laundry and linen processor in Canada. K-Bro operates nine facilities and two distribution centres in eight major cities across Canada providing management services and laundry processing of hospitality, healthcare and specialty linens. Our core values are central to our reputation, our quality is industry-leading, and our ability to deliver on commitments to customers is second to none. K-Bro provides the vital products and services that help people heal, travel, live, and play. We’re helping hospitals and extended care centres care for the young, old and vulnerable in environmentally responsible ways. Our responsibility also extends to ensuring that we have a safe culture at K-Bro. As our society becomes more diverse, we integrate our commitment to responsibility into our new businesses, employees and the communities in which we live and work. “ I N 2 0 1 6 W E C O M M E N C E D C O N S T R U C T I O N O F O U R M O D E R N N E W T O R O N T O F A C I L I T Y A N D B E G A N P L A N N I N G F O R A M U C H L A R G E R S T A T E - O F -T H E - A R T P L A N T I N VA N C O U V E R .” SEAN CURTIS SENIOR VICE-PRESIDENT AND GENERAL MANAGER 5 2016 ANNUAL REPORT “ By expanding our capabilities into new markets, we have opportunities to leverage our operating strengths, grow our revenue, and further enhance operating margins, ensuring consistent value creation for stakeholders.” LINDA McCURDY PRESIDENT AND CHIEF EXECUTIVE OFFICER “ K - B R O H A S A S T A B L E B U S I N E S S M O D E L W I T H S T R O N G F U N D A M E N T A L S T H A T S U P P O R T O U R M A R K E T V A L U A T I O N A N D R E L I A B L E S H A R E H O L D E R D I V I D E N D S .” KRISTIE PLAQUIN CHIEF FINANCIAL OFFICER FROM LEFT TO RIGHT: Ross Smith, Linda McCurdy, Kristie Plaquin, Michael Percy, Sean Curtis, Steven Matyas, Matthew Hills, Ryo Utahara, Sylvain Tremblay, Jerry Ostrzyzek, Jessica Lévesque, Kevin Stephenson, Jeff Gannon, Kevin McElgunn, Sean Jackson W E A R E D E P E N D A B L E . 6 6 WE ARE DEPENDABLE. F I N A N C I A L H I G H L I G H T S The following unaudited financial data has been derived from K-Bro’s consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP. The information set forth below should be read in conjunction with the Management’s Discussion & Analysis, Consolidated Financial Statements and Notes sections of this Annual Report. REVENUE (In millions of Canadian dollars) Years ended December 31 2016 2015 2014 2013 2012 2011 110 120 130 140 150 160 EBITDA (In millions of Canadian dollars) Years ended December 31 2016 2015 2014 2013 2012 2011 18 20 22 24 26 28 TOTAL SHAREHOLDER RETURN $100 investment in 2009 364 429 384 327 239 181 200 K-Bro Linen Inc. S&P/TSX Composite Index 300 400 500 2016 2015 2014 2013 2012 2011 160 132 144 130 115 107 100 7 REVENUE UP 10.1% EBITDA UP 4.0% 1 2 The total shareholder return graph reflects the total cumulative return, assuming reinvestment of all dividends, of $100 invested on December 31, 2009 in each of the Shares of the Corporation and the S&P/TSX Composite (TRIV) Index. The year-end values of each investment shown on the total shareholder return graph are based on share price appreciation plus dividend reinvestment. 2016 ANNUAL REPORT“ W E A R E F O C U S E D O N D E L I V E R I N G T H E B E S T P O S S I B L E V A L U E T O O U R C U S T O M E R S , W H I C H I N T U R N W I L L E N A B L E K - B R O T O C O N T I N U E T O S H O W S T R O N G F I N A N C I A L R E S U L T S .” 8 WE ARE DEPENDABLE.We continue to be committed to remaining as Canada’s premier linen processing company. We focus on businesses that we know and understand – laundry and linen processing – in regions where we have an existing competitive advantage or can develop one. Long-term contracts supported by an experienced workforce and large scale assets are the priority – relationships coupled with assets that provide attractive and sustainable returns. Over the past decade, K-Bro has invested over $147 million in modern plants; investments that have allowed the company to move forward in achieving its vision. Today, we play a significant role in the provision of high quality linen services in all markets that we service. W E A R E D E P E N D A B L E . In aggregate, our nine plants provided services to more than 1,700 customers and employed 1,900 employees in 2016. At December 31, 2016, total assets were $168 million, equity was $117 million and market capitalization was $338 million. “ K - B R O E X C E L S A T D I S C O V E R I N G A N D W I N N I N G N E W O P P O R T U N I T I E S A N D C L I E N T S A N D B U I L D I N G O N T H E S U C C E S S E S W E ’ V E H A D I N O U R D E C A D E S O F E X P E R I E N C E A S L E A D E R S I N O U R S E C T O R .” SEAN CURTIS SENIOR VP & GM 9 2016 ANNUAL REPORT One of our key strategies for growth is to pursue opportunities for expansion through acquisition. We follow a strict set of criteria when evaluating another organization’s potential, examining every facet of a target company. Does it open up a new or strategically placed geographic market or market niche for us? Is there a potential for growth in the market it serves? Will we be able to build on relationships the company already has in place? Can we build on an pre-existing base of business? Does it enhance our resources overall? Taking advantage of relationships already in place includes maintaining the existing labour and management of a company. The ability and commitment demonstrated by staff members is a factor in our decision-making process for acquisitions. The bottom line is that we want profitable, dependable operations where we can bring our expertise and resources to grow the existing base of business. We continue to review and pursue accretive opportunities in new markets and we believe that such opportunities may be available in the future to further add to our growth. We’re dependent on our reputation, resources, and track record as we develop relationships with potential new clients and compete for contracts. These factors are also critical in maintaining stable, responsive, and loyal relationships with our existing customers. D I V E R S I F I E D A N D I N T E G R A T E D S E R V I C E S We provide critical services including, support and management of linen requirements that address each and every one of our customers’ needs. S T R A T E G I C A L L Y P O S I T I O N E D K-Bro has nine plants and two distribution centres located in ten different cities, which ensure our ability to provide uninterrupted service in the wake of disasters, pandemics or other adversity. L O N G - T E R M S T A B L E C O N T R A C T S By anticipating our customers’ needs, delivering consistently dependable service and acting with integrity, K-Bro has developed long-term relationships with its customers. C O M M I T T E D W O R K F O R C E Our corporate culture enables us to attract and retain quality laundry staff and our national presence provides opportunities for career advancement. Five members of our senior management team commenced their careers with K-Bro and have an average tenure in excess of 20 years. S I N G L E S O U R C E F O R C U S T O M E R S K-Bro is able to deliver total linen management services, including laundering, drying, folding, quota cart development, sterilization, and more that focus on efficiencies and cost savings. As one of the largest linen purchasers in Canada, we leverage our market position to drive savings for our customers. K-Bro works in partnership with our clients to reduce their linen consumption. 10 WE ARE DEPENDABLE.AT K-BRO, WE INNOVATE AND DEVELOP NEW PROCESSES AND SYSTEMS, AND FURTHER REFINE BUSINESS DELIVERY AND PRACTICES. In 2016, K-Bro continued to excel at winning new opportunities and clients, building on the successes we’ve had in our decades of experience as leaders in our sector. We obtained significant new business from our competitors in important locations. In British Columbia, we added six major healthcare customers and one hospitality customer to our base. We also secured four more hospitably customers in Quebec, as well as one major healthcare customer in Ontario and added another major healthcare customer in early 2017. In Alberta, we signed three additional hoteliers and extended agreements with several others. Our new clients include some of the finest hotels in the country. Each new customer was a victory for the entire K-Bro team and a reflection of the company as a whole, rather than any individual. The qualities that contribute to our success are the same ones that define us as leaders in customer service – an impeccable and dependable record, comprehensive service programs, financial stability, competitive costs, experience in transitioning large accounts, and access to the resources that support growth, including the ability to purchase linen and equipment in anticipation of higher volume. Our policy at K-Bro has always been one of proactive response. In order to meet our goal of being the absolute best laundry and linen services provider in the country, we continually review our service offerings, adding to our menu and providing more comprehensive service capabilities than other linen companies. We watch our industry and think ahead to strategically address the future needs of the markets we serve. Our clients talk to us not only about their present needs, but about the direction of the future. They depend on the knowledge we’ve accumulated over our history. During 2016 we refined our operating processes at the new Regina processing facility, began construction of our new Toronto processing facility and commenced planning for our new Vancouver facility while continuing to deliver stronger results to our shareholders. K-Bro’s value-added services provide a ‘one-stop shop’ for linen services, and currently include: • Exchange cart preparation • Delivery of carts to user wards and departments • Reusable OR linen and pack rental (KOR services) • Distribution and control of uniforms • Personal clothing services • Customer service programs • Linen purchase and supply • Linen inventory management reports and services • Sterilization of operating room linen packs At K-Bro, we continue to innovate and develop new processes and systems, and further refine business delivery and practices. When we launched our company on the public markets we stated that we were ready for whatever lay ahead of us. As the events of the next twelve years unfolded, our readiness contributed to our success in dependability and growth. The hands-on nature of our management team and established relationships with open lines of communication with our customers are the source of our advantage. WE ARE DEPENDABLE. 11 2016 ANNUAL REPORT“ A S E V E N T S H A V E U N F O L D E D S I N C E E N T E R I N G T H E P U B L I C M A R K E T, O U R R E A D I N E S S H A S C O N T R I B U T E D T O O U R S U C C E S S I N D E P E N D A B I L I T Y A N D G R O W T H .” The following selected unaudited financial data has been derived from K-Bro’s consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP. The information set forth below should be read in conjunction with the Management’s Discussion & Analysis, Consolidated Financial Statements and Notes sections of this Annual Report. Years ended December 31 Income Statement Data Revenue EBITDA EBITDA% Net earnings Net earnings per share (Diluted) Balance Sheet Data Working Capital Long-Term Debt Other Financial Data Distributable cash per share Payout Ratio% Price to earnings multiple (12 month trailing) Price to EBITDA multiple (12 month trailing) Return on shareholders’ equity ROE % Total Shareholder return, YTD% Total Shareholder return, 5 yrs% Market capitalization Share price: High Low Close 2016 2015 2014 2013 2012 2011 159,089 28,236 17.7 11,527 1.44 144,537 27,140 18.8 12,068 1.52 136,440 131,202 126,290 116,859 26,241 19.2 12,198 1.72 23,317 17.8 10,336 1.47 24,517 19.4 11,149 1.59 19,946 17.1 7,928 1.14 13,766 25,800 8,670 2,349 21,717 0 9,434 19,640 8,064 5,818 7,245 6,095 2.76 43.5 29.3 11.9 9.9 14.9 66.4 2.69 44.8 33.5 14.9 10.7 13.1 2.85 42.0 26.9 12.5 11.1 19.4 2.61 44.2 27.0 12.0 14.5 41.2 2.72 41.8 18.1 8.2 16.5 34.9 2.40 45.9 19.6 7.8 12.6 27.5 155.0 182.9 235.2 253.8 121.1 338,190 406,872 367,023 280,976 203,613 155,821 50.98 36.69 42.15 56.99 43.00 50.95 47.90 36.90 46.11 40.50 28.38 39.60 30.18 21.20 28.86 22.98 17.28 22.24 ($ Thousands of Canadian dollars, except per share data and percentages) 12 WE ARE DEPENDABLE.17 18 18 19 20 23 24 26 27 29 30 31 31 31 32 34 34 35 36 36 I N T R O D U C T I O N S T R A T E G Y F O U R T H Q U A R T E R O V E R V I E W S E L E C T E D A N N U A L F I N A N C I A L I N F O R M A T I O N S U M M A R Y O F 2 0 1 6 R E S U L T S A N D E V E N T S K E Y P E R F O R M A N C E D R I V E R S O U T L O O K R E S U L T S O F O P E R A T I O N S L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S D I V I D E N D S D I S T R I B U T A B L E C A S H F L O W O U T S T A N D I N G S H A R E S R E L A T E D P A R T Y T R A N S A C T I O N S C R I T I C A L A C C O U N T I N G E S T I M A T E S T E R M I N O L O G Y C H A N G E S I N A C C O U N T I N G P O L I C I E S R E C E N T A C C O U N T I N G P R O N O U N C E M E N T S F I N A N C I A L I N S T R U M E N T S C R I T I C A L R I S K S A N D U N C E R T A I N T I E S C O N T R O L S A N D P R O C E D U R E S 13 2016 ANNUAL REPORT14 WE ARE DEPENDABLE.“ E V E R Y D A Y W E M U S T E A R N T H E R E S P E C T A N D F A I T H O F O U R C U S T O M E R S W I T H T H E H I G H E S T Q U A L I T Y & H I G H E S T V A L U E S E R V I C E .” 15 2016 ANNUAL REPORTM A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S O F F I N A N C I A L C O N D I T I O N & R E S U L T S O F O P E R A T I O N S The following Management’s Discussion and Analysis (“MD&A”) is supplemental to, and should be read in conjunction with, the audited Consolidated Financial Statements of K-Bro Linen Inc. (“the Corporation”) for the years ended December 31, 2016 and 2015, as well as the unaudited interim condensed Consolidated Financial Statements for the periods ended March 31, 2016, June 30, 2016 and September 30, 2016. The Corporation and its wholly-owned subsidiaries, including K-Bro Linen Systems Inc., are collectively referred to as “K-Bro” in this MD&A. Management is responsible for the information contained in this MD&A and its consistency with information presented to the Audit Committee and Board of Directors. All information in this document has been reviewed and approved by the Audit Committee and Board of Directors. This review was performed by management with information available as of March 24, 2017. In the interest of providing current Shareholders of K-Bro Linen Inc. and potential investors with information regarding current results and future prospects, our public communications often include written or verbal forward-looking statements. Forward-looking statements are disclosures regarding possible events, conditions, or results of operations that are based on assumptions about future economic conditions and courses of action, and include future-oriented financial information. This MD&A contains forward-looking information that represents internal expectations, estimates or beliefs concerning, among other things, future activities or future operating results and various components thereof. The use of any of the words “anticipate”, “continue”, “expect”, “may”, “will”, “project”, “should”, “believe”, and similar expressions suggesting future outcomes or events are intended to identify forward-looking information. Statements regarding such forward-looking information reflect management’s current beliefs and are based on information currently available to management. These statements are not guarantees of future performance and are based on management’s estimates and assumptions that are subject to risks and uncertainties, which could cause K-Bro’s actual performance and financial results in future periods to differ materially from the forward-looking information contained in this MD&A. These risks and uncertainties include, among other things: (i) risks associated with acquisitions, including the possibility of undisclosed material liabilities; (ii) K-Bro’s competitive environment; (iii) utility and labour costs; (iv) K-Bro’s dependence on long-term contracts with the associated renewal risk; (v) increased capital expenditure requirements; (vi) reliance on key personnel; (vii) changing trends in government outsourcing; and (viii) the availability of future financing. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking information include: (i) volumes and pricing assumptions; (ii) expected impact of labour cost initiatives; and (iii) the level of capital expenditures. Although the forward-looking information contained in this MD&A is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Certain statements regarding forward-looking information included in this MD&A may be considered “financial outlook” for purposes of applicable securities laws, and such financial outlook may not be appropriate for purposes other than this MD&A. Forward looking information included in this MD&A includes the expected annual healthcare revenues to be generated from the Company’s contracts with the William Osler Health System and Trillium Health Partners as well as the anticipated capital costs for the new Vancouver facility, and statements with respect to future expectations on margins and volume growth. All forward-looking information in this MD&A is qualified by these cautionary statements. Forward-looking information in this MD&A is presented only as of the date made. Except as required by law, K-Bro does not undertake any obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. This MD&A also makes reference to certain measures in this document that do not have any standardized meaning as prescribed by IFRS and, therefore, are considered non-GAAP measures. These measures may not be comparable to similar measures presented by other issuers. Please see “Terminology” for further discussion. 16 WE ARE DEPENDABLE.I N T R O D U C T I O N C O R E B U S I N E S S K-Bro is the largest owner and operator of laundry and linen processing facilities in Canada. K-Bro provides a comprehensive range of general linen and operating room linen processing, management and distribution services to healthcare institutions, hotels and other commercial accounts. K-Bro currently has nine processing facilities in eight major Canadian cities including Victoria, Vancouver, Calgary, Edmonton, Regina, Toronto, Montréal and Québec City, and two distribution centers in Saskatchewan. I N D U S T R Y & M A R K E T K-Bro provides laundry and linen services to Canadian healthcare, hospitality and other commercial customers. Typical services offered by K-Bro include the processing, management and distribution of general and operating room linens, including sheets, blankets, towels, surgical gowns and drapes and other linen. Other types of processors in K-Bro’s industry in Canada include independent privately owned facilities (i.e. typically small, single facility companies), public sector central laundries and public and private sector on- premise laundries (known as “OPLs”). Participants in other sectors of the laundry and linen services industry, such as uniform rental companies (which own and launder uniforms worn by their customers’ employees) typically do not offer services that significantly overlap with those offered by K-Bro. Our partnerships with healthcare institutions and hospitality clients across Canada demonstrate K-Bro’s commitment to build relationships that foster continuous improvement, provide flexibility to adjust to changing circumstances as required and which incorporate incentives, penalties and sharing of risks and rewards as circumstances warrant. As a result, clients across the country have entered into long- term relationships with us, with most having renewed their contracts several times. In this competitive industry, K-Bro is distinctive in Canada in its ability to deliver products and services that provide value to our customers. Management believes that the healthcare and hospitality sectors of the laundry and linen services industry represent a stable base of annual recurring business with opportunities for growth as additional healthcare beds and funds are made available to meet the needs of an aging demographic. I N D U S T R Y C H A R A C T E R I S T I C S & T R E N D S Management believes that the industry in which K-Bro operates exhibits the following characteristics and trends: Stable Industry with Moderate Cyclicality As evidenced by the stability in the number of approved hospital beds in the healthcare system and hotel rooms in the hospitality industry. The potential for step-changes in volumes and revenues that align with contractual arrangements exists within this industry. Service relationships are generally formalized through contracts in the healthcare sector that are typically long term (from seven to ten years), while contracts in the hospitality sector usually range from two to five years. Outsourcing and Privatization Healthcare institutions and regional authorities are facing funding pressures and must continually evaluate the allocation of scarce resources. Consequently there are often advantages to healthcare institutions in outsourcing the processing of healthcare linen to private sector laundry companies such as K-Bro because of the economies of scale and significant management expertise that can be provided on a more comprehensive and cost-effective basis than customers can achieve in operating their own laundry facilities. Fragmentation Most Canadian cities have at least one and sometimes several private sector competitors operating in the healthcare and hospitality sectors of the laundry and linen services industry. Management believes that the presence of these operators industry provides consolidation opportunities for participants with the financial means to complete acquisitions. larger C U S T O M E R S & P R O D U C T M I X K-Bro’s customers include some of the largest healthcare institutions and hospitality providers in Canada. Healthcare customers include acute care hospitals and long-term care facilities. Most of K-Bro’s hospitality customers (typically >250 rooms) generate between 500,000 and 3 million pounds of linen per year. Most healthcare customers generate between 500,000 pounds of linen per year for a hospital and up to 41 million pounds of linen per year for a healthcare region. 17 2016 ANNUAL REPORTS T R A T E G Y K-Bro maintains the following three-part strategic focus: Secure and Maintain Long-Term Contracts with Large Healthcare and Hospitality Customers K-Bro’s core service is providing high quality laundry and linen services at competitive prices to large healthcare and hospitality customers under long-term contracts. K-Bro’s contracts in the healthcare sector typically range from seven to ten years in length. Contracts in the hospitality sector typically range from two to five years. Extend Core Services To New Markets Management has demonstrated its ability to successfully expand K-Bro’s business into new markets from its established bases. Since 2005, K-Bro has entered four new geographic markets across Canada. These new markets have contributed significantly to K-Bro’s growth. Management believes that new outsourcing opportunities will continue to arise in the near to medium-term and that K-Bro is well-positioned for continued growth, particularly as healthcare and hospitality institutions continue to increase their focus on core services and confront pressures for capital and cost savings. Management may in the future expand its core services to new markets either through acquisitions or by establishing new facilities. Its choice of areas for expansion will depend on the availability of suitable acquisition candidates, the volume of healthcare and hospitality linen to be processed and the policies of applicable governments. Introduce Related Services In addition to focusing on its core services, the Corporation also attempts to capitalize on attractive business opportunities by introducing closely-related services that enable it to provide more complete solutions to K-Bro’s healthcare and hospitality customers. These related service offerings include K-Bro Operating Room (“KOR”) services and on-site services. For three major hospitals in Toronto, K-Bro performs the sterilization of operating room linen packs. F O U R T H Q U A R T E R R E V I E W In the fourth quarter of 2016, revenue increased by 4.2% to $39.3 million from $37.7 million in the comparative period. This increase was due to additional volume from the 3sHealth region associated with the commissioning of the new facility in Regina, additional awarded healthcare volume from the recently signed Vancouver lower mainland contract, organic growth at existing customers, and new customers secured in existing markets. These gains were partially offset by price concessions in Vancouver as a result of contractual terms related to the new ten year contract. EBITDA was $6.4 million for the three months ended December 31, 2016, compared to $6.2 million in the comparative period of 2015. EBITDA margins have been impacted by one-time and transition costs associated with the relocation of our new Toronto facility and one-time and transition costs needed to support new business and resulting temporary capacity constraints in Toronto and Vancouver. Management estimates these one-time and transition costs in the quarter to be approximately $0.5 million and expects margins to return to 2015 historical levels after the completion of and transition into our new facilities in Toronto in 2017 and Vancouver in 2018. REVENUE UP 10.1% “ I N T H E F O U R T H Q U A R T E R O F 2 0 1 6 , R E V E N U E W A S $ 3 9 . 3 M I L L I O N W H I C H W A S 4 . 2 % H I G H E R T H A N T H E $ 3 7 . 7 M I L L I O N G E N E R A T E D I N T H E C O M P A R A T I V E Q U A R T E R O F 2 0 1 5 .” 18 WE ARE DEPENDABLE.S E L E C T E D A N N U A L F I N A N C I A L I N F O R M A T I O N Revenue Earnings before income taxes Net earnings Net Earnings Per Share Basic Diluted Total Assets Long-Term Debt Dividends declared to Shareholders Dividends declared to Shareholders per share Weighted Average Number of Shares Outstanding: Basic Diluted ($ Thousands of Canadian dollars, except per share data and percentages) 19 2016 2015 2014 159,089 16,367 11,527 1.45 1.44 168,289 25,800 9,613 1.200 144,537 17,261 12,068 136,440 16,663 12,198 1.52 1.52 1.72 1.72 143,023 132,638 2,349 9,570 1.200 - 8,498 1.183 7,955,026 7,986,729 7,920,609 7,930,492 7,090,937 7,111,232 2016 ANNUAL REPORTS U M M A R Y O F 2 0 1 6 R E S U L T S A N D K E Y E V E N T S F I N A N C I A L G R O W T H accounts representing an additional $5.2 million in revenue with additional new customer opportunities going forward. K-Bro delivered strong financial results in 2016 driven by the operating results from all nine of its processing plants and two distribution centers. Net earnings were $11.5 million or $1.45 per share (basic). Cash flow from operating activities was $24.5 million and distributable cash flow was $22.1 million. Revenue increased in fiscal 2016 to $159.1 million or by 10.1% compared to 2015. This increase was due to additional volume from the 3sHealth region associated with the commissioning of the new facility in Regina, additional awarded healthcare volume from the recently signed Vancouver lower mainland contract, organic growth at existing customers, and new customers secured in existing markets. These gains were partially offset by price concessions in Vancouver as a result of contractual terms related to the new ten year contract. EBITDA (see Terminology) increased in the year to $28.2 million from $27.1million in 2015, which is an increase of 4.0%. The EBITDA margin decreased from 18.8% in 2015 compared to 17.7% in 2016. The change in EBITDA and margin was predominantly impacted by one-time and transition costs associated with the relocation of our new Toronto facility and one-time and transition costs needed to support new business and resulting temporary capacity constraints in Toronto and Vancouver. Management estimates these one- time and transition costs incurred primarily in Q3 and Q4 to be approximately $0.9 million. Near-Term & Long-Term Growth & Margin Impact Management has embarked on a strategy in its Toronto and Vancouver markets that it believes will position the company for accelerated growth in its healthcare and hospitality businesses. The strategy includes capital investments to build large efficient state-of-the-art facilities with meaningful additional capacity in Toronto and Vancouver. In addition, the company will invest to upgrade one of its Vancouver plants to create a more efficient facility with meaningful additional capacity. These investments are being made because management believes that new opportunities, both current and future, justify the significant additional capacity. Since the third quarter we have been awarded two new healthcare accounts in Toronto (William Osler Health System and Trillium Health Partners), representing total revenue of $7.6 million annually and management believes that it has many additional new customer opportunities going forward. Furthermore, in the past year in Vancouver we have re-signed most of our current healthcare volume through to 2027 and been awarded six new healthcare The construction and/or upgrade of three large facilities enable us to bid on significant amount of additional business, but also will create margin pressure through 2017 and 2018 as the company incurs one-time and transition costs associated with these large investments. Those one-time and transition costs were approximately $0.9mm for the second half of 2016. While the margin pressure may vary by quarter through 2017 and 2018, management believes that the one-time and transition costs incurred in 2017 and 2018 will position the company to achieve more growth and a lower cost structure into the future and that the company will return to normalized margins closer to those achieved in 2015 as it enters 2019. Key events in our Toronto and Vancouver markets are summarized below. Vancouver Facility Development As announced on March 2, 2016, K-Bro has commenced the planning and development of a new state-of-the- art facility with a projected investment of up to $50 million with the potential for an additional $5 million due to exposure from the U.S. dollar and construction costs that have not been fully tendered. The new Vancouver plant will be located in Burnaby, and the Corporation expects to transition to the new facility during the third quarter of 2018. The new facility will enable K-Bro to expand current capacity, to accommodate the additional awarded volume, and to provide the opportunity to consolidate the healthcare volume from its existing two Vancouver-area facilities. In addition to investing in the new facility, K-Bro will upgrade and replace equipment at one of its existing Vancouver-area facilities, which will be used to process the consolidated hospitality volume. K-Bro will not be renewing the lease for the remaining Vancouver-area facility and related assets will be transferred to the other K-Bro facilities. K-Bro believes it will achieve significant operating efficiencies at its new plant. K-Bro plans to finance the entire amount from its existing $85 million credit facility. However, management intends to continually assess its opportunities to maintain a conservative amount of leverage and balance sheet flexibility in the short and long-term basis in order to ensure that sufficient capital is available for future growth needs. It is anticipated that transition costs associated with the new Vancouver plant will negatively impact EBITDA margins over the third and fourth quarters of 2018 while the plant becomes operational. 20 WE ARE DEPENDABLE.Toronto Facility Development As announced on February 3, 2016, K-Bro is in the process of relocating to a new state-of-the-art facility in Toronto. The new Toronto plant is located in Mississauga, and the Corporation expects to complete its transition to the new facility during the first quarter of 2017. Management estimates that the costs to commission a new leased facility are $37 million for new efficiency enhancing equipment, and leaseholds. As at December 31, 2016, K-Bro has incurred $24.9 million of the total expected capital cost. K-Bro’s strategy includes significant growth in its healthcare and hospitality volumes, and the additional capacity and the long- term lease enables K-Bro to grow into the additional capacity as opportunities emerge. K-Bro plans to finance the entire amount from its existing $85 million credit facility. However, management intends to continually assess its opportunities to maintain a conservative amount of leverage and balance sheet flexibility in the short and long-term basis in order to ensure that sufficient capital is available for future growth needs. It is anticipated that transition costs associated with the new Toronto plant will negatively impact EBITDA margins over several quarters as the plant becomes operational. Management anticipates that transition costs will impact the first three quarters of 2017 with margins returning to historical levels during the fourth quarter of 2017. Toronto Contract Awards On February 28, 2017 the Corporation was awarded a five year contract to provide laundry and linen services to St. Michaels Hospital. The contract contains two renewal options for an additional two years. The contract extends the existing relationship between the Corporation and St. Michael’s Hospital and is a result of a competitive RFP process. On March 24, 2017 the Corporation was awarded a contract to provide laundry and linen services to Trillium Health Partners. The new contract is for seven years with renewal options for an additional eight years, and is a result of a competitive RFP process. Expected additional annual revenue from the contract is $4 million. Toronto Collective Bargaining Agreement The Teamsters represent 14 drivers in our Toronto facility. The Collective Bargaining Agreement representing these employees expired on December 31, 2016. The members of the bargaining unit rejected the company’s contract proposal and on January 31, 2017 the Corporation locked out the 14 Toronto drivers and employed replacement drivers to service its Toronto accounts. The Corporation is presently in negotiations with the Teamsters to reach a new collective bargaining agreement. There have been no service interruptions to any customers as a result of the lock-out. Management anticipates one-time and transition costs associated with this lock-out in the amount of $0.4 million to be incurred in the first quarter of 2017. 21 2016 ANNUAL REPORT“ D U R I N G 2 0 1 6 W E R E F I N E D O U R O P E R A T I N G P R O C E S S E S , B E G A N C O N S T R U C T I O N A N D C O M M E N C E D P L A N N I N G , A L L W H I L E D E L I V E R I N G S T R O N G E R R E S U L T S T O O U R S H A R E H O L D E R S .” 22 WE ARE DEPENDABLE.K E Y P E R F O R M A N C E D R I V E R S K-Bro’s key performance drivers focus on growth, profitability, stability and cost containment in order to maintain dividends and maximize Shareholder value. The following outlines our results on a period-to-period comparative basis in each of these areas: Q4, 2016 YTD, 2016 Q4, 2015 YTD, 2015 Growth EBITDA1 % Revenue% Distributable cash flow% Profitability EBITDA1 EBITDA Margin% Net earnings Stability Debt to total capitalization2 % Unutilized line of credit Payout ratio% Dividends declared per share Cost Containment Wages and Benefits% Utilities% Expenses included in EBITDA% ($ Thousands of Canadian dollars, except percentages) 1 2 EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, gain or loss on disposals, finance expense and depreciation and amortization). See Terminology. Debt to total capitalization is defined as total debt divided by total capital. See Terminology. 3.8 4.2 25.5 6,407 16.3 2,197 18.1 57,550 41.7 0.300 45.6 6.4 83.7 4.0 10.1 3.4 28,236 17.7 11,527 18.1 57,550 43.5 1.200 45.4 6.1 82.3 -2.5 11.5 -6.2 6,173 16.4 2,158 2.0 46,001 52.1 0.300 46.0 6.3 83.6 3.4 5.9 5.6 27,140 18.8 12,068 2.0 46,001 44.8 1.200 45.1 6.1 81.2 23 2016 ANNUAL REPORTO U T L O O K “We are pleased with the solid growth during 2016, driven by additional volume from the Vancouver lower mainland, 3sHealth contracts and customers secured in existing markets.” said Linda McCurdy, President & Chief Executive Officer. “We look forward to 2017, especially in light of securing two new Toronto healthcare contracts starting in 2017, and the renewal of an existing Toronto healthcare contract. In terms of our previously announced plant builds, we have nearly completed the successful transition of the volume to our newly constructed state-of-the-art Toronto facility and are confident that we will secure additional business to fill capacity. We continue to make progress in the planning and design of our new Vancouver facility with a targeted completion date of 2018. We view 2017 and 2018 as transition years that will impact our margins but once complete will enable us to realize additional efficiencies, increase capacity and increase market share. While the margin pressure may vary by quarter through 2017 and 2018, we believe that the one-time and transition costs incurred in 2017 and 2018 will position the company to achieve more growth and a lower cost structure into the future and that the company will return to normalized margins closer to those achieved in 2015 as it enters 2019. We remain excited about our growth plans and are confident in our ability to continue to provide value to our customers and our shareholders.” K-Bro also has several proposals pending and has entered into discussions with potential new customers. In addition, K-Bro continues to seek potential acquisition candidates. Neither the timing nor the degree of likelihood of success of any of these proposals or acquisitions can be stated with any degree of accuracy. R E V O LV I N G C R E D I T F A C I L I T Y On September 26, 2016, K-Bro renewed the credit facility through to July 31, 2020 with substantially the same terms. As a part of this renewal, the credit facility was increased to $85.0 million. Management intends to continually assess its opportunities to maintain a conservative amount of leverage and balance sheet flexibility in the short and long-term basis in order to ensure that sufficient capital is available for future growth needs. E F F E C T S O F E C O N O M I C U N C E R T A I N T Y K-Bro believes that it is positioned to withstand market volatility and uncertainty given that: • Approximately 72.3% of its revenues in the quarter were from large publicly funded healthcare customers which are geographically diversified across multiple provinces; • At December 31, 2016, K-Bro had unutilized borrowing capacity of $57.6 million or 67.7% of the revolving credit line available; and, • K-Bro’s prudent approach to managing capital has added cash flow and liquidity to the Corporation, thereby improving its ability to withstand the turmoil in the national and global capital markets. “ W E R E M A I N E X C I T E D A B O U T O U R G R O W T H P L A N S A N D A R E C O N F I D E N T I N O U R A B I L I T Y T O C O N T I N U E P R O V I D I N G V A L U E T O O U R C U S T O M E R S A N D S H A R E H O L D E R S .” 24 WE ARE DEPENDABLE.R E V E N U E , E B I T D A & E A R N I N G S For the year ended December 31, 2016, K-Bro’s revenue increased by 10.1% to $159.1 million from $144.5 million in the comparative period. This increase was due to additional volume from the 3sHealth region associated with the commissioning of the new facility in Regina, additional awarded healthcare volume from the recently signed Vancouver lower mainland contract, organic growth at existing customers, and new customers secured in existing markets, offset by price concessions in Vancouver as a result of contractual terms related to a new ten year contract. In 2016, approximately 70.0% of K-Bro’s revenue was generated from healthcare institutions which is slightly higher compared to 68.5% in 2015, mainly due to volume from the 3sHealth region and additional Vancouver lower mainland volume. EBITDA increased in the year to $28.2 million from $27.1million in 2015, which is an increase of 4.0%. The EBITDA margin decreased from 18.8% in 2015 compared to 17.7% in 2016. The change in EBITDA and margin was predominantly impacted by one-time and transition costs associated with the relocation of our new Toronto facility and one-time and transition costs needed to support new business and resulting temporary capacity constraints in Toronto and Vancouver. Management estimates these one-time and transition costs incurred primarily in Q3 and Q4 to be approximately $0.9 million. Net earnings decreased by $0.6 million or from $12.1 million in 2015 to $11.5 million in 2016. Net earnings as a percentage of revenue decreased by 1.1% to 7.2% in 2016 from 8.3% in 2015. This decrease in net earnings is primarily due to the flow through items in EBITDA discussed above and higher depreciation of property, plant and equipment and interest expense, offset by a lower income tax expense. 25 $159.089 MILLION 2016 REVENUE $111.384 $47.705 (IN MILLIONS) HEALTHCARE HOSPITALITY $144.537 MILLION 2015 REVENUE $98.940 $45.597 (IN MILLIONS) HEALTHCARE HOSPITALITY $ Thousands of CDN, except per share data and percentages 1 EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, gain or loss on disposals, financial charges and depreciation and amortization). See Terminology. 2016 ANNUAL REPORTR E S U L T S O F O P E R A T I O N S Q U A R T E R L Y F I N A N C I A L I N F O R M A T I O N The following table provides certain selected consolidated financial and operating data prepared by K-Bro management for the preceding eight quarters: 2016 2015 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Healthcare revenue Hospitality revenue Total revenue 28,374 10,877 39,251 27,333 14,224 41,557 27,553 11,916 39,469 28,124 10,688 38,812 27,100 10,580 37,680 23,978 13,722 37,700 24,005 11,332 35,337 23,857 9,963 33,820 Expenses included in EBITDA EBITDA1 EBITDA as a % of revenue% Depreciation and amortization Finance expense (recovery) Loss on disposal of equipment Earnings before income taxes Income tax expense Net earnings Net earnings as a % of revenue% Basic Earnings per share Diluted earnings per share 32,844 34,019 31,954 32,036 31,507 30,123 28,251 27,516 6,407 16.3 2,866 247 86 3,208 1,011 2,197 5.6 0.276 0.274 7,538 18.1 2,748 (11) - 4,801 1,387 3,414 8.2 0.429 0.427 7,515 19.0 2,674 110 19 4,712 1,328 3,384 8.6 0.426 0.425 6,776 17.5 2,737 393 - 3,646 1,114 2,532 6.5 0.319 0.318 6,173 16.4 2,859 156 172 2,986 828 2,158 5.7 0.272 0.271 7,577 20.1 2,326 (128) 4 5,375 1,523 3,852 10.2 0.486 0.483 7,086 20.1 2,219 177 14 4,676 1,637 3,039 8.6 0.384 0.382 6,304 18.6 2,178 (98) - 4,224 1,205 3,019 8.9 0.381 0.380 Total assets 168,289 153,923 148,068 146,816 143,023 145,106 135,516 133,229 Total long-term financial liabilities 33,949 17,596 14,360 12,717 8,958 6,776 6,361 5,892 Funds provided by operations Long-term debt Dividends declared per share 6,071 7,581 25,800 10,338 0.300 0.300 4,143 7,252 0.300 6,726 5,970 0.300 3,897 2,349 0.300 5,733 3,773 4,214 - - - 0.300 0.300 0.300 Historically, the Corporation’s financial and operating results are stronger in the second and third quarters as a result of seasonality and the associated higher hospitality volumes. Other fluctuations in net income from quarter-to-quarter can also be attributed to hiring and labour cost trends, timing of linen purchases, utility costs, timing of repairs and maintenance expenditures, business development, capital spending patterns and changes in corporate tax rates and income tax expenses. For the year ended December 31, 2016, the Corporation’s distributable cash flow was $22.1 million with a debt to total capitalization of 18.1% Due to the strategic plans K-Bro expects to execute in the coming fiscal year, management expects the debt to total capitalization to increase, mainly as a result of strategic capital expenditures as part of the investment in the new Vancouver facility and remaining commitments related to the new Toronto facility. Management believes the unutilized balance of $57.6 million is sufficient for the company’s operations in the foreseeable future. However, management intends to continually assess its opportunities to maintain a conservative amount of leverage and balance sheet flexibility in the short and long-term basis in order to ensure that sufficient capital is available for future growth needs. 26 WE ARE DEPENDABLE.O P E R A T I N G E X P E N S E S Wages and benefits increased to $72.2 million in 2016 from $65.2 million in 2015, and increased as a percentage of revenue from 45.1% in 2015 to 45.4% in the same period of 2016. The increase in the period is due to the incremental labour required to process the increased volumes, significant overtime costs and one-time costs to support new business, strong volumes and temporary capacity constraints in certain of our markets as well as one-time transition costs associated with the Toronto facility move and rising labour costs from incremental increases in the wage rate. Linen expenses increased to $17.5 million in 2016 from $15.0 million in 2015, and increased as a percentage of revenue to 11.0% from 10.4% in 2015. The increase in costs is primarily due to the additional linen required for the 3sHealth volume and linen required for the additional volume awarded as part of the Vancouver lower mainland contract. Utility costs increased to $9.8 million compared to $8.8 million in 2015 and remained constant as a percentage of revenue at 6.1%, with higher costs associated with the new Regina facility and the increased volumes in certain markets. Delivery costs increased to $8.8 million and to 5.5% as a percentage of revenues compared to $7.0 million and 4.8% in 2015. The increase is a result of increased business activity, geographical dispersity of the Corporation’s new customer base in Saskatchewan and transition costs associated with the additional volume from the Vancouver lower mainland contract. Occupancy costs increased to $5.3 million and to 3.3% as a percentage of revenue, compared to $5.2 million and 3.6% in 2015. This increase is a result of a new distribution facility, additional costs associated with the commissioning of the new Regina facility, and additional warehousing costs to address the temporary storage requirements related to the additional volume from the Vancouver lower mainland contract. Materials and supplies increased to $4.8 million and to 3.0% as a percentage of revenue, compared to $4.2 million and 2.9% in 2015, due to higher costs associated with the new Regina facility and to support the increased volumes in certain markets. Repairs and maintenance increased to $4.9 million and to 3.1% as a percentage of revenues, compared to $4.6 million and 3.2% in 2015, primarily related to the timing of scheduled maintenance activities. Corporate costs increased to $7.5 million and to 4.7% as a percentage of revenues compared to $7.4 million and 5.1% in 2015, primarily due to the timing of costs and initiatives to support the Corporation’s growth and business strategies across the plants. Depreciation of property, plant and equipment and amortization of intangible assets represents the expense related to the appropriate matching of certain of K-Bro’s long- term assets to the estimated useful life and period of economic benefit of those assets. The increase during the year is related to the completion of the new Regina facility. Income tax includes current and future income taxes based on taxable income and the temporary timing differences between the tax and accounting bases of assets and liabilities. Income tax reflects the provision on the earnings of the Corporation. L I Q U I D I T Y & C A P I T A L R E S O U R C E S In 2016 cash generated by operating activities was $24.5 million, compared to $17.6 million during 2015. The change in cash from operations is primarily due to the change in working capital items driven mainly from the timing of business activity and payments related to capital commitments. During 2016, cash generated by financing activities was $13.8 million compared to cash used in financing activities $7.2 million in 2015. Financing activities in 2016 consisted of net proceeds from the revolving credit facility, offset by dividends paid to Shareholders. During 2016, cash used in investing activities was $38.4 million compared to $24.1 million in 2015. Investing activities during the year related primarily to the cash settlement of plant equipment for the new Regina plant, leasehold improvements and purchase of plant equipment for the new Toronto and Vancouver plant, and the purchase of equipment in existing plants to facilitate strategic growth. 27 2016 ANNUAL REPORTC O N T R A C T U A L O B L I G A T I O N S Payments due under contractual obligations for the next five years and thereafter are as follows: PAYMENTS DUE BY PERIOD TOTAL < 1 YEAR 1-3 YEARS 4-5 YEARS > 5 YEARS Long-term debt Operating lease commitments Utility commitments Linen purchase obligations Property, plant and equipment commitments 25,800 55,407 7,721 6,926 37,525 - 5,236 2,078 6,926 28,897 25,800 10,259 3,081 - 8,628 - 8,751 2,562 - - - 31,161 - - - The operating lease obligations are secured by automotive equipment and plants, and are more fully described in the audited annual consolidated financial statements. The source of funds for these commitments will be from operating cash flow and, if necessary, the undrawn portion of the revolving credit facility. “ W E H A V E R E C E N T L Y S I G N E D $ 7 . 6 M I L L I O N I N R E V E N U E O F N E W B U S I N E S S .” F I N A N C I A L P O S I T I O N Long-term debt Shareholders’ equity Total capitalization Debt to Total Capitalization% (see Terminology for definition) 2016 2015 25,800 116,672 142,472 18.1 2,349 113,240 115,589 2.0 For the year ended December 31, 2016, the Corporation had a debt to total capitalization of 18.1%, unused revolving credit facility of $57.6 million and has not incurred any events of default under the terms of its credit facility agreement. As at December 31, 2016, the Corporation had net working capital of $13.8 million compared to its working capital position of $8.7 million at December 31, 2015. The increase in working capital is primarily attributable to timing differences related in the cash settlement of new plant equipment, and deposits related to the acquisition of equipment related across the plants. Management believes that K-Bro has the capital resources and liquidity necessary to meet its commitments, support its operations and finance its growth strategies. In addition to K-Bro’s ability to generate cash from operations and its revolving credit facility, K-Bro believes it is also able to issue additional shares or increase its borrowing capacity, if necessary, to provide for capital spending and sustain its property, plant and equipment. 28 WE ARE DEPENDABLE.D I V I D E N D S FISCAL PERIOD PAYMENT DATE # OF SHARES OUTSTANDING AMOUNT PER SHARE$ TOTAL AMOUNT123 $ AMOUNT PER SHARE$ TOTAL AMOUNT4 56 $ 2016 2015 January February March Q1 April May June Q2 July August February 12 March 15 April 15 May 13 June 15 July 15 August 15 September 15 September October 14 Q3 October November December Q4 YTD November 15 December 15 January 13 7,985,713 7,985,713 7,985,713 7,985,713 8,023,480 8,023,480 8,023,480 8,023,480 8,023,480 8,023,480 8,023,480 8,023,480 0.10000 0.10000 0.10000 0.30000 0.10000 0.10000 0.10000 0.30000 0.10000 0.10000 0.10000 0.30000 0.10000 0.10000 0.10000 0.30000 1.20000 799 799 799 2,396 799 802 802 2,403 802 802 802 2,407 802 802 802 2,407 9,613 0.10000 0.10000 0.10000 0.30000 0.10000 0.10000 0.10000 0.30000 0.10000 0.10000 0.10000 0.30000 0.10000 0.10000 0.10000 0.30000 1.20000 796 796 796 2,388 796 796 799 2,391 799 799 799 2,396 799 799 799 2,396 9,570 $ Thousands of CDN, except per share data and percentages 1 2 3 4 5 6 The total amount of dividends paid was $0.10000 per share for a total of $798,571 per month for January - March 2016; when rounded in thousands, $2,396 of dividends were paid for the quarterly period. The total amount of dividends paid was $0.10000 per share for a total of $798,571 for April 2016, $802,348 for May 2016, and $802,348 for June 2016. When rounded in thousands, $2,403 of dividends were paid for the quarterly period. The total amount of dividends paid was $0.10000 per share for a total of $802,348 per month for July - December 2016; when rounded in thousands, $2,407 of dividends were paid in Q3 and Q4. The total amount of dividends paid was $0.10000 per share for a total of $795,974 per month for January - March 2015; when rounded in thousands, $2,388 of dividends were paid for the quarterly period. The total amount of dividends paid was $0.10000 per share for a total of $795,974 for April 2015, $795,974 for May 2015, and $798,571 for June 2015. When rounded in thousands, $2,391 of dividends were paid for the quarterly period. The total amount of dividends paid was $0.10000 per share for a total of $798,571 per month for July - December 2015; when rounded in thousands, $2,396 of dividends were paid in Q3 and Q4. For the three months ended December 31, 2016, the Corporation declared a $0.300 per share dividend compared to $0.722 per Share of Distributable Cash Flow (see Terminology). The payout ratio for the three months ended December 31, 2016 was 41.7% by the Directors of the Corporation. All such dividends are discretionary. Dividends are declared payable each month in equal amounts to Shareholders on the last business day of each month and are paid by the 15th of the following month. The Corporation’s policy is to pay dividends to Shareholders from its available distributable cash flow while considering requirements for capital expenditures, working capital, growth capital and other reserves considered advisable The Corporation designates all dividends paid or deemed to be paid as Eligible Dividends for purposes of subsection 89(14) of the Income Tax Act (Canada), and similar provincial and territorial legislation, unless indicated otherwise. 29 2016 ANNUAL REPORTD I S T R I B U T A B L E C A S H F L O W The Corporation’s source of cash for dividends is distributable cash flow provided by operating activities. Distributable cash flow, reconciled to cash provided by operating activities as calculated under IFRS, is presented as follows: 2016 2015 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Cash provided by operating activities 6,071 7,581 4,143 6,726 3,897 5,733 3,773 4,214 Deduct (add): Net Changes in non-cash working capital items1 Share-based compensation Maintenance capital expenditures2 (336) 1,102 (2,625) 368 264 337 289 330 1,270 665 483 293 (1,387) (1,193) (2,302) (1,439) 262 420 329 226 334 268 379 365 Distributable cash flow 5,775 5,853 5,168 5,285 4,602 6,371 5,473 4,909 Dividends declared Dividends declared per share Payout ratio3 % 2,407 0.300 41.7 2,407 0.300 41.1 2,403 0.300 46.5 2,396 0.300 45.3 2,396 0.300 52.1 2,396 0.300 37.6 2,391 0.300 43.7 2,388 0.300 48.6 Weighted average shares outstanding during the period, basic Weighted average shares outstanding during the period, diluted Trailing-twelve months (“TTM“) 7,965 7,957 7,952 7,946 7,930 7,922 7,916 7,914 8,004 7,991 7,965 7,965 7,948 7,974 7,966 7,942 Distributable cash flow 22,081 20,908 21,426 21,731 21,355 21,661 21,086 20,721 Dividends Payout ratio3 % 9,613 43.5 9,602 45.9 9,591 44.8 9,579 44.1 9,570 44.8 9,394 43.4 9,136 43.3 8,847 42.7 $ Thousands of CDN, except per share data and percentages 1 2 3 Net changes in non-cash working capital is excluded from the calculation as management believes it would introduce significant cash flow variability and affect underlying cash flow from operating activities. Significant variability can be caused by such things as the timing of receipts (which individually are large because of the nature of K-Bro’s customer base and timing may vary due to the timing of customer approval, vacations of customer personnel, etc.) and the timing of disbursements (such as the payment of large volume rebates done once annually). As well, large increases in working capital are generally required when contracts with new customers are signed as linen is purchased and accounts receivable increase. Management feels that this amount should be excluded from the distributable cash flow calculation. Maintenance capital expenditures include costs required to maintain or replace assets which do not have a discrete return on investment. The ratio of dividends paid compared to distributable cash flow is periodically reviewed by the Board of Directors to take into account the current and prospective performance of the business and other items considered to be prudent. Payout ratio is calculated on the dividends declared divided by the distributable cash flow. 30 WE ARE DEPENDABLE.O U T S T A N D I N G S H A R E S As at December 31, 2016, the Corporation had 8,023,480 common shares outstanding. Basic and diluted weighted average number of common shares outstanding for 2016 were 7,955,026 and 7,986,729, respectively, (7,920,609 and 7,930,492, respectively, for the comparative 2015 periods). In accordance with the LTI plan and in conjunction with the performance of the Corporation in the 2015 fiscal year, on April 18, 2016 the Compensation, Nominating and Corporate Governance Committee of the Board of Directors approved LTI compensation of $1.6 million (2015 – $1.4 million) to be paid as shares issued from treasury. As at December 31, 2016, the value of the shares held in trust by the LTI trustee was $1.9 million (December 31, 2015 – $2.0 million) which was comprised of 44,634 in unvested common shares (December 31, 2015 – 39,716) with a nil aggregate cost (December 31, 2015 – $nil). As at March 24, 2017 there were 8,023,480 common shares issued and outstanding including 44,634 shares issued but held as unvested treasury shares. R E L A T E D P A R T Y T R A N S A C T I O N S The Corporation incurred expenses in the normal course of business for advisory consulting services provided by Mr. Matthew Hills, a director of the Corporation. The amounts charged are recorded at their exchange amounts and are subject to normal trade terms. For the year ended December 31, 2016, the Corporation incurred fees totaling $138,000 (2015 – $138,000). C R I T I C A L A C C O U N T I N G E S T I M A T E S The Corporation’s summary of significant accounting policies are contained in note 2 to the audited consolidated financial statements. The Corporation’s financial statements include estimates and assumptions made by management in respect of operating results, financial conditions, contingencies, commitments, and related disclosures. Actual results may vary from these estimates. The following are, in the opinion of management, the Corporation’s most critical accounting estimates, being those that involve the most difficult, subjective and complex judgments, and/or requiring estimates that are inherently uncertain and which may change in subsequent reporting periods. and disseminated. Management also regularly evaluates these estimates and assumptions which are based on past experience and other factors that are deemed reasonable under the circumstances. K-Bro has hired individuals and consultants who have the skills required to make such estimates and ensures that individuals or departments with the most knowledge of the activity are responsible for the estimates. Furthermore, past estimates are reviewed and compared to actual results, and actual results are compared to budgets in order to make more informed decisions on future estimates. leadership K-Bro’s includes ongoing team’s mandate development of procedures, standards and systems to allow K-Bro staff to make the best decisions possible and ensuring those decisions are in compliance with the Corporation’s policies. Preparation of the Corporation’s consolidated financial statements requires management to make estimates and assumptions that affect: • volume rebates; • • linen in service; intangible assets; • goodwill; • income taxes; • provisions; and, • allowance for doubtful accounts. The following discusses the most significant accounting judgments and estimates in the Corporation’s consolidated financial statements. Volume Rebates The Corporation earns revenue from linen management and laundry services based on written service agreements whereby K-Bro has agreed to collect, launder, deliver and replenish linens. K-Bro recognizes revenue in the period in which the services are provided. Volume rebates, where applicable, are recorded based on annualized expected volumes when it is reasonable that the criteria are likely to be met. Based on past experience, management believes that volumes utilized for any estimates are reasonable and would not expect a material deviation to the balance of accrued liabilities or revenue. Linen in Service K-Bro has continuously its management and internal reporting systems to ensure that accurate, timely, internal and external information is gathered refined and documented Linen in service is recorded at cost. Operating room linen is amortized on a straight-line method over an estimated service life of 24 months. General linen is amortized based on usage which results in an estimated service life of the linen equal to 31 2016 ANNUAL REPORT24 months. Based on past experience, management believes that a service life of 24 months is representative of the average service life of linen and would not expect a material deviation to the balance of linen in service or linen expense. T E R M I N O L O G Y A D D I T I O N A L G A A P M E A S U R E S Intangible Assets EBITDA The Corporation accounts for intangible assets and goodwill in accordance with IFRS 3, Business Combinations and IAS 38, Intangible Assets. In a business combination, K-Bro may acquire the assets and assume certain liabilities of an acquired entity. The allocation of the purchase price for these transactions involves judgment in determining the fair values assigned to the tangible and intangible assets acquired and the liabilities assumed on the acquisition. The determination of these fair values involves a variety of assumptions, including revenue growth rates, expected operating income, discount rates, and earnings multiples. If K-Bro’s estimates or assumptions change prior to finalizing the purchase price allocation for a transaction, a revision to the purchase price allocation or the carrying value of the related assets and liabilities acquired may impact our net income in future periods. We report on our EBITDA (Earnings before interest, taxes, depreciation and amortization) because it is a key measure used by management to evaluate performance. EBITDA is utilized in measuring compliance with debt covenants and in making decisions relating to dividends to Shareholders. We believe EBITDA assists investors in assessing our performance on a consistent basis as it is an indication of our capacity to generate income from operations before taking into account management’s financing decisions and costs of consuming tangible and intangible capital assets, which vary according to their vintage, technological currency and management’s estimate of their useful life. Accordingly, EBITDA comprises revenues less operating costs before: financing costs, capital asset and intangible asset amortization, gain/loss on disposal and impairment charges, and income taxes. At the date of the acquisition, K-Bro must estimate the value of acquired intangible assets that do not have a well- defined market value, such as the value of customer lists and relationships and non-competition agreements. Valuing these assets involves estimates of the future net benefit to K-Bro and the useful life of such benefits and is based upon various internal and external factors. A change in those estimates could cause a material change to the value of the intangible assets. Although intangible assets are amortized over their useful life, if the estimated value of an intangible asset has declined below its amortized book value, a write-down would be recorded in the period in which the event causing the decline in value occurred, which would increase amortization expense and decrease the intangible assets balance. The Corporation reviews goodwill at least annually and other non-financial assets when there is any indication that the asset might be impaired. The Corporation applies judgment in assessing the likelihood of renewal of significant contracts included in the intangible assets. The Corporation has estimated the fair value of CGUs to which goodwill is allocated based on value in use using discounted cash flow models that required assumptions about future cash flows, margins, and discount rates. At this time, K-Bro does not believe any intangible assets have a book value in excess of their fair market value. EBITDA is a sub-total presented within the statement of earnings in accordance with the amendments made to IAS 1 which became effective January 1, 2016. EBITDA is not considered an alternative to net earnings in measuring K-Bro’s performance. EBITDA should not be used as an exclusive measure of cash flow since it does not account for the impact of working capital changes, capital expenditures, debt changes and other sources and uses of cash, which are disclosed in the consolidated statements of cash flows. N O N - G A A P M E A S U R E S Distributable Cash Flow Distributable cash flow is a measure used by management to evaluate its performance. While the closest IFRS measure is cash provided by operating activities, distributable cash flow is considered relevant because it provides an indication of how much cash generated by operations is available after capital expenditures. It shall be noted that although we consider this measure to be distributable cash flow, financial and non-financial covenants in our credit facilities and dealer agreements may restrict cash from being available for dividends, re-investment in the Corporation, potential acquisitions, or other purposes. Investors should be cautioned that distributable cash flow may not actually be available for growth or distribution from the Corporation. Management refers to “Distributable cash flow” as to cash provided by (used in) operating activities with the addition of net changes in non- cash working capital items, less share-based compensation, and maintenance capital expenditures. 32 WE ARE DEPENDABLE.Net Earnings Add Income tax expense Finance expense Depreciation of property, plant and equipment Amortization of intangible assets Loss on disposal of property, plant and equipment EBITDA $ Thousands of CDN Payout Ratio Payout ratio is defined by management as the actual cash dividend divided by distributable cash. This is a key measure used by investors to value K-Bro, assess its performance and provide an indication of the sustainability of dividends. The payout ratio depends on the distributable cash and the Corporation’s dividend policy. Debt to Total Capitalization 3 MTHS ENDED DEC 31 YEAR ENDED DEC 31 2016 2015 2016 2015 2,197 2,158 11,527 12,068 1,011 247 2,438 428 86 828 154 2,353 506 172 4,840 739 9,235 1,790 105 5,193 107 7,573 2,009 190 6,407 6,171 28,236 27,140 Distributable Cash Flow, Payout Ratio, Debt to Total Capitalization, Adjusted EBITDA, Adjusted net earnings, and Adjusted net earnings per share are not calculations based on IFRS and are not considered an alternative to IFRS measures in measuring K-Bro’s performance. Distributable Cash Flow, Payout Ratio, Adjusted EBITDA, Adjusted net earnings, and Adjusted net earnings per share do not have standardized meanings in IFRS and are therefore not likely to be comparable with similar measures used by other issuers. Debt to total capitalization is defined by management as the total long-term debt divided by the Corporation’s total shareholder’s equity. This is a measure used by investors to assess the Corporation’s financial structure. Off Balance Sheet Arrangements As at December 31, 2016, the Corporation has not entered into any off balance sheet arrangements. 33 2016 ANNUAL REPORT“ W E L O O K F O R W A R D T O 2 0 1 7 , E S P E C I A L L Y I N L I G H T O F S E C U R I N G T W O N E W T O R O N T O H E A L T H C A R E C O N T R A C T S S T A R T I N G T H I S Y E A R .” C H A N G E S I N A C C O U N T I N G P O L I C I E S The Corporation has prepared its December 31, 2016 audited consolidated financial statements in accordance with IFRS. See Note 2 of the Corporation’s audited annual Consolidated Financial Statements for more information regarding the significant accounting principles used to prepare the Consolidated Financial Statements. R E C E N T A C C O U N T I N G P R O N O U N C E M E N T S The following standard has been issued but has not yet been applied in preparing the consolidated financial statements. • • • IFRS 15, Revenue from Contracts with Customers, was issued in May 2014 by the IASB and supersedes IAS 18, “Revenue”, IAS 11 “Construction Contracts” and other interpretive guidance associated with revenue recognition. IFRS 15 provides a single model to determine how and when an entity should recognize revenue, as well as requiring entities to provide more informative, relevant disclosures in respect of its revenue recognition criteria. IFRS 15 is to be applied prospectively and is effective for annual periods beginning on or after January 1, 2018, with earlier application permitted. The Corporation is in the process of evaluating the impact that IFRS 15 may have on the financial statements. IFRS 9, Financial Instruments, was issued in July 2014 by the IASB and supersedes IAS 39, “Financial Instruments: Recognition and Measurement”. IFRS 9 addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortized cost, fair value through OCI and fair value through P&L. IFRS 9 is to be applied prospectively and is effective for annual periods beginning on or after January 1, 2018, with earlier application permitted. The Corporation is in the process of evaluating the impact that IFRS 9 may have on the financial statements. IFRS 2, Share-based Payment, was amended in June 2016 by IASB, addressing three classification and measurement issues. The amendment clarifies the measurement basis for cash-settled, share based payments and the accounting for modifications that change an award from cash-settled to equity settled. It also introduces an exception to the principles in IFRS 2 that will require an award to be treated as if it was wholly-equity settled, where an employer is obliged to withhold an amount for the employee’s tax obligation associated with a share based payment and pay that amount to the tax authority. The Corporation is in the process of evaluating the impact that the amendment may have on the financial statements. • IFRS 16, Leases, was issued in January 2016 and applies to annual reporting periods beginning on or after January 1, 2019. IFRS 16 specifies how an IFRS reporter will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The Corporation is in the process of evaluating the impact that IFRS 16 may have on the financial statements. 34 WE ARE DEPENDABLE.F I N A N C I A L I N S T R U M E N T S K-Bro’s financial instruments at December 31, 2016 consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, long-term debt. The dividends payable and Corporation does not enter into financial instruments for trading or speculative purposes. Financial assets are either classified as available for sale, held to maturity, trading or loans and receivables. Financial liabilities are recorded at amortized cost. Initially, all financial assets and financial liabilities must be recorded on the balance sheet at fair value. Subsequent measurement is determined by the classification of each financial asset and liability. Unrealized gains and losses on financial assets that are held as available for sale are recorded in other comprehensive income until realized, at which time they are recorded in the consolidated statement of earnings. All derivatives, including embedded derivatives that must be separately accounted for, are recorded at fair value in the consolidated balance sheet. Transaction costs related to financial instruments are capitalized and then amortized over the expected life of the financial instrument using the effective interest method. Derivative financial instruments are utilized by the Corporation to manage cashflow risk against the volatility in interest rates on its long-term debt and foreign exchange rates on its equipment purchase commitments. The Corporation typically does not utilize derivative financial instruments for trading or speculative purposes. The Corporation has a floating interest rate debt that gives rise to risks that its earnings and cash flows may be adversely impacted by fluctuations in interest rates. In order to manage these risks, the Corporation may enter into interest rate swaps, forward contracts on foreign currency, utilities and textiles or option contracts. The Corporation has entered into several electrical and natural gas contracts at December 31, 2016. The Corporation has examined the terms of the natural gas and electricity contracts and has determined that these contracts will be physically settled and as such are not considered to be financial instruments. 35 35 2 0 1 6 A N N U A L R E P O R T 2016 ANNUAL REPORTC R I T I C A L R I S K S A N D U N C E R T A I N T I E S As at December 31, 2016, there are no material changes in the Corporation’s risks or risk management activities since December 31, 2015. The Corporation’s results of operations, business prospects, financial condition, cash dividends to Shareholders and the trading price of the Corporation’s Shares are subject to a number of risks. These risk factors include: dependence on long-term contracts and the associated renewal risk thereof; the effects of market volatility and uncertainty; potential future tax changes; the competitive environment; our ability to acquire and successfully integrate and operate additional businesses; utility costs; the labour markets; the fact that our credit facility imposes numerous covenants and encumbers assets; and, environmental matters. For a discussion of these risks and other risks associated with an investment in Corporation Shares, see Risk Factors – Risks Related to K-Bro and the Laundry and Linen Industry detailed in the Corporation’s Annual Information Form that is available at www.sedar.com. C O N T R O L S A N D P R O C E D U R E S In order to ensure that information with regard to reports filed or submitted under securities legislation present fairly in all material respects the financial information of K-Bro, management, including the President and Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), are responsible for establishing and maintaining disclosure controls and procedures, as well as internal control over financial reporting. Disclosure Controls and Procedures The Corporation has established disclosure controls and procedures to ensure that information disclosed in this MD&A and the related financial statements of K-Bro was properly recorded, processed, summarized and reported to the Board of Directors and the Audit Committee. The Corporation’s CEO and CFO have evaluated the effectiveness of these disclosure controls and procedures for the year ended December 31, 2016, and the CEO and CFO have concluded that these controls were operating effectively. Internal Controls over Financial Reporting The CEO and CFO acknowledge responsibility for the design of internal controls over financial reporting (“ICFR”). Consequently the CEO and CFO confirm that the additions to these controls that occurred during the year ended December 31, 2016 did not materially affect, or are reasonably likely to materially affect, the Corporation’s ICFR. Based upon their evaluation of these controls for the year ended December 31, 2016, the CEO and CFO have concluded that these controls were operating effectively. A control system, no matter how well conceived and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system are met. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, including instance of fraud, if any, have been detected. These inherent limitations include, amongst other items: (i) that managements’ assumptions and judgments could ultimately prove to be incorrect under varying conditions and circumstances; or, (ii) the impact of isolated errors. Additionally, controls may be circumvented by the unauthorized acts of individuals, by collusion of two or more people, or by management override. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential (future) conditions. Additional information regarding K-Bro including required securities filings are available on our website at www.k-brolinen.com and on the Canadian Securities Administrators’ website at www.sedar.com; the System for Electronic Document Analysis and Retrieval (“SEDAR”). Vous pouvez obtenir des renseignements supplémentaires sur la Société, y compris les documents déposés auprès des autorités de réglementation, sur notre site Web, au www.k-brolinen.com et sur le site Web des autorités canadiennes en valeurs mobilières au www.sedar.com, le site Web du Système électronique de données, d’analyse et de recherche (« SEDAR »). 36 WE ARE DEPENDABLE.37 2016 ANNUAL REPORTC O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 39 40 41 42 43 44 63 I N D E P E N D E N T A U D I T O R ’ S R E P O R T F I N A N C I A L P O S I T I O N E A R N I N G S A N D C O M P R E H E N S I V E I N C O M E C H A N G E S I N E Q U I T Y C A S H F L O W N O T E S T O T H E C O N S O L I D A T E D S T A T E M E N T S C O R P O R A T E I N F O R M A T I O N 38 WE ARE DEPENDABLE.MARCH 24, 2017 I N D E P E N D E N T A U D I T O R ’ S R E P O R T TO THE SHAREHOLDERS OF K-BRO LINEN INC. We have audited the accompanying consolidated financial statements of K-Bro Linen Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2016 and 2015, and the consolidated statements of earnings and comprehensive income, changes in equity and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of K-Bro Linen Inc. and its subsidiaries as at December 31, 2016 and 2015 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. PRICEWATERHOUSECOOPERS LLP TD Tower, 10088 102 Avenue NW, Suite 1501 Edmonton, AB, Canada T5J 3N5 T 1 780 441 6700 F 1 780 441 6776 “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. 39 CHARTERED PROFESSIONAL ACCOUNTANTS 2016 ANNUAL REPORTC O N S O L I D A T E D S T A T E M E N T S O F F I N A N C I A L P O S I T I O N DEC 31, 2016 DEC 31, 2015 ASSETS Current assets Accounts receivable Prepaid expenses and deposits Linen in service (note 6) Total Property, plant and equipment (note 7) Intangible assets (note 8) Goodwill (note 9) Assets Total LIABILITIES Current liabilities Accounts payable and accrued liabilities (note 10) Income taxes payable Dividends payable to shareholders Total Long-term debt (note 11) Unamortized lease inducements (note 13) Deferred income taxes (note 14) Liabilities Total SHAREHOLDERS’ EQUITY Share capital Contributed surplus Retained earnings Shareholder’s Equity Total 18,451 1,472 11,511 31,434 113,258 3,141 20,456 168,289 16,270 596 802 17,668 25,800 1,863 6,286 51,617 109,390 1,944 5,338 116,672 17,155 1,061 11,279 29,495 88,141 4,931 20,456 143,023 19,835 191 799 20,825 2,349 696 5,913 29,783 108,079 1,737 3,424 113,240 Contingencies and commitments (note 15) 168,289 143,023 $ Thousands of CDN APPROVED ON BEHALF OF THE CORPORATION ROSS S. SMITH DIRECTOR MATTHEW HILLS DIRECTOR The accompanying notes are an integral part of these consolidated financial statements. 40 WE ARE DEPENDABLE.C O N S O L I D A T E D S T A T E M E N T S O F E A R N I N G S & C O M P R E H E N S I V E I N C O M E YEARS ENDED DECEMBER 31 2016 2015 REVENUE Expenses Wages and benefits Linen (note 6) Utilities Delivery Occupancy costs Materials and supplies Repairs and maintenance Corporate Total EBITDA Other expenses Depreciation of property, plant and equipment (note 7) Amortization of intangible assets (note 8) Finance expense (note 12) Loss on disposal of property, plant and equipment Total Earning before income taxes Current income tax expense Deferred income tax expense Income tax expense Net earnings and Comprehensive income Net earnings per share: (note 17) Basic Diluted 159,089 144,537 72,247 17,547 9,776 8,793 5,313 4,808 4,855 7,514 130,853 28,236 9,235 1,790 739 105 11,869 16,367 4,467 373 4,840 11,527 1.45 1.44 65,213 15,041 8,788 7,001 5,183 4,204 4,597 7,370 117,397 27,140 7,573 2,009 107 190 9,879 17,261 4,245 948 5,193 12,068 1.52 1.52 Weighted average number of shares outstanding: Basic Diluted 7,955,026 7,986,729 7,920,609 7,930,492 $ Thousands of CDN, except share and per share amounts The accompanying notes are an integral part of these consolidated financial statements. 41 2016 ANNUAL REPORTC O N S O L I D A T E D S T A T E M E N T S O F C H A N G E S I N E Q U I T Y TOTAL SHARE CAPITAL CONTRIBUTED SURPLUS RETAINED EARNINGS TOTAL EQUITY As at January 1, 2016 Net earnings Dividends declared (note 19) Employee share based compensation expense Shares vested during the year As at December 31, 2016 108,079 - - - 1,311 109,390 1,737 - - 1,518 (1,311) 1,944 3,424 11,527 (9,613) - - 113,240 11,527 (9,613) 1,518 - 5,338 116,672 As at January 1, 2015 Net earnings Dividends declared (note 19) Employee share based compensation expense Shares vested during the year As at December 31, 2015 $ Thousands of CDN 106,870 1,642 926 109,438 - - - 1,209 108,079 - - 1,304 (1,209) 1,737 12,068 (9,570) - - 12,068 (9,570) 1,304 - 3,424 113,240 The accompanying notes are an integral part of these consolidated financial statements. 42 WE ARE DEPENDABLE.C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W YEARS ENDED DECEMBER 31 2016 2015 OPERATING ACTIVITIES Net earnings Depreciation of property, plant and equipment (note 7) Amortization of intangible assets (note 8) Lease inducements, net of amortization Employee share based compensation expense Loss on disposal of property, plant and equipment Deferred income taxes Change in non-cash working capital items (note 20) Cash provided by operating activities FINANCING ACTIVITIES Net proceeds of revolving credit facility Dividends paid to shareholders (note 19) Cash provided (used in) by financing activities INVESTING ACTIVITIES 11,527 12,068 9,235 1,790 1,167 1,518 105 373 7,573 2,009 (154) 1,304 190 948 25,715 23,938 (1,194) 24,521 23,451 (9,610) 13,841 (6,321) 17,617 2,349 (9,567) (7,218) Purchase of property, plant and equipment (note 7) (38,367) (23,981) Proceeds from disposal of property, plant and equipment Purchase of intangible assets (note 8) Cash used in investing activities Change in cash and cash equivalents during the year Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year SUPPLEMENTARY CASH FLOW INFORMATION Interest paid Income taxes paid $ Thousands of CDN 5 - 22 (184) (38,362) (24,143) - - - (13,744) 13,744 - 631 4,062 282 4,297 The accompanying notes are an integral part of these consolidated financial statements. 43 2016 ANNUAL REPORTN O T E S T O T H E C O N S O L I D A T E D S T A T E M E N T S K-Bro Linen Inc. (the “Corporation” or “K-Bro”) is incorporated in Canada under the Business Corporations Act (Alberta). The Corporation and its wholly owned subsidiaries provide a range of linen services to healthcare institutions, hotels and other commercial accounts that include the processing, management and distribution of general linen and operating room linen. The Corporation provides services from nine processing facilities in eight major cities across Canada from Victoria, British Columbia to Québec City, Québec and two distribution centres in Saskatchewan. The Corporation’s common shares are traded on the Toronto Stock Exchange under the symbol “KBL”. The address of the Corporation’s registered head office is 14903 – 137 Avenue, Edmonton, Alberta, Canada. These unaudited interim condensed consolidated financial statements were approved and authorized for issuance by the Board of Directors (“the Board”) on March 24, 2017. 1 . B A S I S O F P R E S E N T A T I O N The consolidated financial statements of the Corporation have been prepared in accordance with International Financial Reporting Standards (IFRS) as published in the CPA Handbook. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Corporation’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the Consolidated Financial Statements are disclosed in Note 5. 2 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. A. Basis of Measurement The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value, including derivative instruments. 1 2 Years Ended December 31, 2016 and 2015. $ Thousands of CDN, except per share data and percentages. B. Principles of Consolidation The consolidated financial statements include the Corporation, its wholly owned subsidiaries and the long-term incentive plan trust (note 2(q) (ii)). All inter-company balances and transactions have been eliminated upon consolidation. C. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand, deposits with banks, other short-term highly liquid investments with original maturities of three months or less. Cash and cash equivalents are classified as loans and receivables and are carried at amortized cost, which is equivalent to fair value. D. Linen in Service Linen in service is stated at cost less accumulated depreciation. The cost is based on the expenditures that are directly attributable to the acquisition of linen, with operating room linen amortized across its estimated service life of 24 months and general linen amortized based on usage which results in an estimated average service life of 24 months. E. Revenue Recognition Revenue from linen management and laundry services is primarily based on written service agreements whereby the Corporation agrees to collect, launder, deliver and replenish linens. The Corporation recognizes revenue in the period in which the services are provided. F. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Corporation and the cost of the item can be reliably measured. The carrying amount of a replaced part is de-recognized. Repairs and maintenance are charged to the statement of earnings during the financial period in which they are incurred. General and specific borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized during the period of time that is required to complete and prepare the asset for its intended use or sale. 44 WE ARE DEPENDABLE. Qualifying assets are assets that necessarily take a substantial period of time to get ready for their intended use or sale. The major categories of property, plant and equipment are depreciated on a straight-line basis to allocate their cost over their estimated useful lives as follows: ASSET Buildings Laundry equipment Office equipment Delivery equipment Computer equipment RATE 15-25 years 7-20 years 2-5 years 5 years 2 years Leasehold improvements Lease term Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included as part of other gains and losses in the statement of earnings and comprehensive income. G. Impairment of Financial Assets At each reporting date, the Corporation assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Corporation recognizes an impairment loss equal to the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument’s original effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly through the use of an allowance account. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. H. Impairment of Non-Financial Assets Property, plant and equipment and intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived assets that are not amortized are subject to an annual impairment test. For the purpose of measuring recoverable amounts, assets are grouped at the lowest level for which there are separately identifiable cash flows (cash- generating unit or “CGU”). The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use (being the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The Corporation evaluates impairment losses, other than goodwill impairment, for potential reversals when events or circumstances warrant such consideration. I. Intangible Assets Intangible assets are recorded at cost and include customer contracts in progress and related relationships, which are being amortized using the straight-line method over the remaining lives of the related contracts and relationships. Intangible assets which relate to computer software are amortized using the straight-line method over five years when put into service. These estimates are reviewed at least annually and are updated if expectations change as a result of changing client relationships or technological obsolescence. J. Income Taxes The tax expense for the year comprises current and deferred tax. Tax is recognized in statement of earnings, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. The current income tax provision is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date of the taxation authority where the Corporation income. Management operates and generates periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. taxable Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. 45 2016 ANNUAL REPORTDeferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. K. Business Combinations Business combinations are accounted for using the acquisition method. The acquired identifiable net assets are measured at their fair value at the date of acquisition. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. Any deficiency of the purchase price below the fair value of the net assets acquired is recorded as a gain in net earnings. Associated transaction costs are expensed when incurred. L. Goodwill Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the identifiable assets acquired, less liabilities assumed, based on their estimated fair values at the acquisition date. Goodwill is allocated as of the date of the business combination. Goodwill is tested for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate a potential impairment. Goodwill acquired through a business combination is allocated to each CGU, or group of CGUs, that are expected to benefit from the related business combination. A CGU represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. M. Volume Rebates The Corporation earns revenue from linen management and laundry services based on written service agreements whereby K-Bro has agreed to collect, launder, deliver and replenish linens. K-Bro recognizes revenue in the period in which the services are provided. Volume rebates, where applicable, are recorded based on annualized expected volumes when it is reasonable that the criteria are likely to be met. Based on past experience, management believes that volumes utilized for any estimates are reasonable and would not expect a material deviation to the balance of accrued liabilities or revenue. N. Earnings Per Share Basic earnings per share (“EPS”) is calculated by dividing net earnings for the period attributable to Shareholders of the Corporation by the weighted average number of Common shares outstanding during the period. Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The number of common shares included within the weighted average is computed using the treasury stock method. The Corporation’s potentially dilutive Common shares are comprised of long-term incentive plan equity compensation granted to officers and key employees (notes 2(q)(ii)). O. Foreign Currency Translation Foreign currency transactions are translated into Canadian dollars using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the statement of earnings within “finance expense”. P. Lease Inducements Tenant allowances and lease inducements are deferred when credited or received and amortized on a straight-line basis as a reduction of rent expense over the term of the related lease. For lease contracts with escalating lease payments, total rent expense for the lease term is expensed on a straight-line basis over the lease term. The difference between rent expensed and amounts paid is recorded as an increase or deferral in unamortized lease inducements. Q. Employee Benefits i. Post-employment benefit obligations The Corporation contributes on behalf of its employees to their individual Registered Retirement Savings Plans subject to an annual maximum of 4% of gross personal earnings. The Corporation accounts for contributions as an expense in the period that they are incurred. The Corporation does not provide any other post-employment or post-retirement benefits. ii. Existing equity-based compensation plan of the Corporation On June 16, 2011, the Shareholders of the Corporation approved a new Long-term Incentive Plan (“LTI”). Under the LTI, awards are granted annually in respect of the prior fiscal year to the eligible participants based on a percentage of annual salary. The amount of the award (net of withholding obligations) is satisfied by issuing treasury shares to be held in trust by the trustee pursuant to the terms of the LTI. All awards issued under the provisions of the LTI are recorded as compensation expense. 46 WE ARE DEPENDABLE.Subject to the discretion of the Compensation, Nominating and Corporate Governance Committee of the Board of Directors, one-quarter of a Participant’s grant will vest on the Determination Date (defined as the first May 15th following the date that the Directors of the Corporation approve the audited consolidated financial statements of the Corporation for the prior year). The remaining three-quarters of the Participant’s grant will vest on November 30th following the second anniversary of the Determination Date. If a change of control occurs, all LTI Shares held by the Trustee in respect of unvested grants will vest immediately. LTI participants are entitled to receive dividends on all common shares granted under the LTI whether vested or unvested. In most circumstances, unvested common shares held by the LTI trustee for a participant will be forfeited if the participant resigns or is terminated for cause prior to the applicable vesting date, and those common shares will be disposed of by the trustee to K-Bro for no consideration and such Common shares shall thereupon be cancelled. If a participant is terminated without cause, retires or resigns on a basis which constitutes constructive dismissal, the participant will be entitled to receive his or her unvested common shares on the regular vesting schedule under the LTI. R. Financial Instruments Financial assets and financial liabilities are initially recognized at fair value and are subsequently accounted for based on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired and their characteristics. Except in very limited circumstances, the classification is not changed subsequent to initial recognition. Transaction costs are recognized immediately in income or are capitalized, depending upon the nature of the transaction and the associated instrument. Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period and included as part of the profit and loss. Loans, receivables and other liabilities Loans, receivables and other liabilities are accounted for at amortized cost using the effective interest method. The Corporation has made the following classifications: ASSET Financial assets CLASSIFICATION MEASUREMENT Accounts receivable Loans and receivables Amortized cost Financial liabilities Accounts payable and accrued liabilities Other liabilities Amortized cost Dividends payable Other liabilities Amortized cost Long-term debt Other liabilities Amortized cost Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. 3 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S A D O P T E D J A N 1 , 2 0 1 6 On January 1, 2016, the Corporation adopted the Amendments to IAS 1, Presentation of Financial Statements. IAS 1 was amended to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. Adoption of the amendments did not result in any changes to the presentation or disclosures in the financial statements. 4 . N E W S T A N D A R D S A N D I N T E R P R E T A T I O N S N O T Y E T A P P L I E D The following standards have been issued but have not yet been applied in preparing the consolidated financial statements. • IFRS 15, Revenue from Contracts with Customers, was issued in May 2014 by the IASB and supersedes IAS 18, “Revenue”, IAS 11 “Construction Contracts” and other interpretive guidance associated with revenue recognition. IFRS 15 provides a single model to determine how and when an entity should recognize revenue, as well as requiring entities to provide more informative, relevant disclosures in respect of its revenue recognition criteria. IFRS 15 is to be applied prospectively and is effective for 47 2016 ANNUAL REPORTannual periods beginning on or after January 1, 2018, with earlier application permitted. The Corporation is in the process of evaluating the impact that IFRS 15 may have on the financial statements. disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. • • IFRS 9, Financial Instruments, was issued in July 2014 by the IASB and supersedes IAS 39, “Financial Instruments: Recognition and Measurement”. IFRS 9 addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortized cost, fair value through OCI and fair value through P&L. IFRS 9 is to be applied prospectively and is effective for annual periods beginning on or after January 1, 2018, with earlier application permitted. The Corporation is in the process of evaluating the impact that IFRS 9 may have on the financial statements. IFRS 16, Leases, was issued in January 2016 and applies to annual reporting periods beginning on or after January 1, 2019. IFRS 16 specifies how an IFRS reporter will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The Corporation is in the process of evaluating the impact that IFRS 16 may have on the financial statements. • On June 20, 2016 the IASB issued an amendment to IFRS 2 “Share based Payment” addressing three classification and measurement issues. The amendment clarifies the measurement basis for cash-settled, share based payments and the accounting for modifications that change an award from cash-settled to equity settled. It also introduces an exception to the principles in IFRS 2 that will require an award to be treated as if it was wholly- equity settled, where an employer is obliged to withhold an amount for the employee’s tax obligation associated with a share based payment and pay that amount to the tax authority. The Corporation is in the process of evaluating the impact that the amendment may have on the financial statements. The amendments are effective for periods beginning on or after January 1, 2018. 5 . C R I T I C A L A C C O U N T I N G E S T I M A T E S A N D J U D G M E N T S The preparation of the Corporation’s consolidated financial statements, in conformity with IFRS, requires management of the Corporation to make estimates and assumptions that affect the reported amount of assets and liabilities and The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and judgments have been applied in a manner consistent with prior periods. The following discusses the most significant accounting judgments and estimates that the Corporation has made in the preparation of the financial statements: Impairment of Goodwill and Non-Financial Assets The Corporation reviews goodwill at least annually and other non-financial assets when there is any indication that the asset might be impaired. The Corporation applies judgment in assessing the likelihood of renewal of significant contracts included in the intangible assets described in note 8. The Corporation has estimated the fair value of CGUs to which goodwill is allocated based on value in use using discounted cash flow models that required assumptions about future cash flows, margins, and discount rates. Refer to note 9 for more details about methods and assumptions used in estimating net recoverable amount. Recognition of Rebate Liabilities judgment In applying its accounting policy for volume rebates, the Corporation must determine whether the processing volume thresholds will be achieved. The most difficult and subjective area of is whether a contract will generate satisfactory volume to achieve minimum levels. Management considers all appropriate facts and circumstances in making this assessment including historical experience, current volumetric run-rates, and expected future events. Linen in Service The estimated service lives of linen in service are reviewed at least annually and are updated if expectations change as a result of physical wear and tear, technical or commercial obsolescence and legal or other limits of use. regularly evaluates Management these estimates and judgments. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. 48 WE ARE DEPENDABLE.6 . L I N E N I N S E R V I C E Balance, beginning of year Additions Amortization charge Balance, end of year 2016 2015 11,279 17,779 (17,547) 11,511 9,794 16,526 (15,041) 11,279 7 . P R O P E R T Y, P L A N T & E Q U I P M E N T LAND BUILDINGS LAUNDRY EQUIP1 OFFICE EQUIP DELIVERY EQUIP COMPUTER EQUIP LEASEHOLD IMPROVEMENTS2 SPARE PARTS TOTAL3 YEAR ENDED, DEC 31, 2016 Opening net book amount 2,454 Additions Disposals Transfers Depreciation charge - - - - 17,964 281 - - 54,316 21,464 (107) - 341 71 - - (980) (6,056) (108) Closing net book amount 2,454 17,265 69,617 304 266 60 (3) - (73) 250 AT DEC 31, 2016 Cost 2,454 19,012 110,175 Accumulated depreciation - (1,747) (40,558) Net book amount 2,454 17,265 69,617 YEAR ENDED, DEC 31, 2015 Opening net book amount 2,425 Additions Disposals Transfers Depreciation charge 29 - - - 6,676 11,638 - - (350) 44,257 17,161 (138) (1,857) (5,107) Closing net book amount 2,454 17,964 54,316 AT DEC 31, 2015 Cost 2,454 18,730 88,858 Accumulated depreciation - (766) (34,542) Net book amount 2,454 17,964 54,316 710 (406) 304 683 (433) 250 274 164 - - (97) 341 417 15 (74) - (92) 266 640 (299) 341 641 (375) 266 539 208 - - (370) 377 1,279 (902) 377 324 509 - - (294) 539 1,071 (532) 539 11,834 12,242 427 136 - - (1,648) - - - 88,141 34,462 (110) - (9,235) 22,428 563 113,258 32,065 (9,637) 563 166,941 - (53,683) 22,428 563 113,258 11,188 758 66,319 74 - 17 29,607 - (212) 2,205 (348) - (1,633) - (7,573) 11,834 427 88,141 19,823 (7,989) 427 132,644 - (44,503) 11,834 427 88,141 1 2 3 Included in laundry equipment are assets under development in the amount of $16,536 (2015 - $65). These assets are not available for service and accordingly are not presently being depreciated. Included in leasehold improvements are assets under development in the amount of $11,547 (2015 - $0). These assets are not available for service and accordingly are not presently being depreciated. Total property, plant and equipment additions include amounts in accounts payable of $1,721 (2015 - $5,626). 49 2016 ANNUAL REPORT8 . I N T A N G I B L E A S S E T S HEALTHCARE CONTRACTS HOSPITALITY CONTRACTS COMPUTER SOFTWARE YEAR ENDED, DEC 31, 2016 Opening net book amount Additions Amortization charge Closing net book amount AT DEC 31, 2016 Cost Accumulated depreciation Net book amount YEAR ENDED, DEC 31, 2015 Opening net book amount Additions Amortization charge Closing net book amount AT DEC 31, 2015 Cost Accumulated depreciation Net book amount 9 . G O O D W I L L 3,550 - (1,043) 2,507 19,200 (16,693) 2,507 4,663 - (1,113) 3,550 19,200 (15,650) 3,550 1,381 - (747) 634 8,550 (7,916) 634 2,088 184 (891) 1,381 8,550 (7,169) 1,381 - - - - 927 (927) - 5 - (5) - 927 (927) - TOTAL 4,931 - (1,790) 3,141 28,677 (25,536) 3,141 6,756 184 (2,009) 4,931 28,677 (23,746) 4,931 The Corporation performed its annual assessment for goodwill impairment as at December 31, 2016 in accordance with its policy described in note 2(l). Goodwill has been allocated to the following CGUs: Calgary Edmonton Vancouver 2 Victoria Vancouver 1 Montréal Québec Total 2016 2015 5,382 4,346 3,413 3,208 2,630 823 654 5,382 4,346 3,413 3,208 2,630 823 654 20,456 20,456 50 WE ARE DEPENDABLE.In assessing goodwill for impairment at December 31, 2016, the Corporation determined that: the assets and liabilities of the CGUs evaluated have not changed significantly from the prior year at December 31, 2015; the estimated recoverable amounts of the CGUs exceeded their carrying amounts by a significant amount; no events or circumstances have changed; and the likelihood of an impairment in goodwill is remote. In performing our analysis, estimated recoverable amounts were determined based on the value in use of the CGUs using available cash flow forecasts over a 5 year period that made maximum use of observable markets for inputs and outputs, including actual historical performance. For periods beyond the budgeted period, cash flows were extrapolated using growth rates that did not exceed the long-term averages for the business. Key assumptions included a weighted average growth rate of 3% (2015 – 3%) and a pre-tax discount rate of 11% to 13% (2015 – 12% to 14%) for all CGUs. The growth rates represent management’s current assessment of future industry trends and are based on both external and internal sources, as well as historical data. The recoverable amount of each CGU was in excess of its carrying amount. Significant CGUs with an individual carrying value greater than 10% of the total consolidated carrying value include Edmonton, Calgary, Victoria, Vancouver 1 and 2. For these CGUs the recoverable amount significantly exceeds the carrying amount. Based on sensitivity analysis, no reasonably possible change in key assumptions would cause the carrying amount of any CGU to exceed its recoverable amount. Based on sensitivity analysis, no reasonably possible change in growth rate assumptions would cause the carrying value to exceed the recoverable amount. A 1% change in the discount rate would not have a significant impact on the recoverable amounts of CGUs. The recoverable amount of each CGU is sensitive to changes in market conditions and could result in material changes. The process for determining the recoverable amount is subjective and requires management to exercise significant judgment in determining the future growth rates and discount rates. “ K - B R O H A S I N V E S T E D O V E R $ 1 4 7 M I L L I O N I N H I G H Q U A L I T Y P L A N T S , I N V E S T M E N T S T H A T H A V E A L L O W E D T H E C O M P A N Y T O M O V E F O R W A R D I N A C H I E V I N G I T S V I S I O N .” 51 51 2 0 1 6 A N N U A L R E P O R T 2016 ANNUAL REPORT1 0 . P R O V I S I O N S The Corporation has recognized provisions as at December 31, 2016 to recognize estimated obligations resulting from operations. The carrying amount of the provisions is estimated at the end of the reporting period based on best available information. The following table provides a continuity schedule of all recorded provisions: Balance, beginning of year Additions Payments Balance, end of year 2016 2015 - - - - 262 - (262) - 1 1 . L O N G - T E R M D E B T PRIME RATE LOAN 1 At January 1, 2016 Net proceeds from debt Repayment of debt Closing Balance at December 31, 2016 At January 1, 2015 Net proceeds from debt Closing Balance at December 31, 2015 2,349 23,451 - 25,800 - 2,349 2,349 1 Prime rate loan, collateralized by a general security agreement, bear interest at prime plus an interest margin dependent on certain financial ratios, with a monthly repayment of interest only, maturing on July 31, 2020 (December 31, 2015 – July 31, 2018). The additional interest margin can range between 0.0% to 1.25% dependent upon the calculated Debt/EBITDA financial ratio, with a range between 0 to 3.5x. As at December 31, 2016, the combined interest rate was 2.7% (December 31, 2015 – 2.7%). The Corporation has a revolving credit facility of up to $85,000 of which $27,450 is utilized (including letters of credit totaling $1,650 per Note 15(a)) as at December 31, 2016). Interest payments only are due during the term of the facility. A general security agreement over all assets, a mortgage against all leasehold interests and real property, insurance policies and an assignment of material agreements have been pledged as collateral. Drawings under the revolving credit facility are available by way of Bankers’ Acceptances, Canadian prime rate loans, letters of credit or standby letters of guarantee. Drawings under the revolving credit facility bear interest at a floating rate, plus an applicable margin based on certain financial performance ratios. The carrying value of borrowings approximate their fair value as the debt is based on a floating rate, the interest rate risk has not changed, and the impact of discounting is not significant. The Corporation has incurred no events of default under the terms of its credit facility agreement. 1 2 . F I N A N C E E X P E N S E Interest on long-term debt Other charges, net Total 2016 2015 372 367 739 70 37 107 52 WE ARE DEPENDABLE.1 3 . U N A M O R T I Z E D L E A S E I N D U C E M E N T S Balance, beginning of year Lease inducements received Amortization charge Total Less current portion, included in accrued liabilities Total 2016 839 1,497 (224) 2,112 (249) 1,863 2015 993 - (154) 839 (143) 696 1 4 . I N C O M E T A X E S A reconciliation of the expected income tax expense to the actual income tax expense is as follows: Current tax: Current tax on profits for the year Total current tax Deferred tax: Origination and reversal of temporary differences Impact of substantively enacted rates and other Total deferred tax 2016 2015 4,467 4,467 4,245 4,245 385 (12) 373 708 240 948 The tax on the Corporation’s earnings differs from the theoretical amount that would arise using the weighted average tax rate applicable to earnings of the consolidated entities as follows: Earnings before income taxes Non-deductible expenses Income subject to tax Income tax at statutory rate of 26.58% (2015 - 26.2%) Impact of substantively enacted rates and other Income tax expense 2016 2015 16,367 1,743 18,110 4,814 26 4,840 17,261 1,667 18,928 4,953 240 5,193 53 2016 ANNUAL REPORTThe analysis of the deferred tax assets and deferred tax liabilities is as follows: Deferred tax assets: Deferred tax asset to be recovered after more than 12 months Deferred tax asset to be recovered within 12 months Total Deferred tax liabilities: Deferred tax liability to be recovered after more than 12 months Deferred tax liability to be recovered within 12 months Total Deferred tax liabilities, net 2016 2015 (601) (94) (695) 3,982 2,999 6,981 6,286 (357) (94) (451) 3,441 2,923 6,364 5,913 The movement of deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdictions, is as follows: Deferred tax assets At January 1, 2015 Charged (credited) to the statement of earnings At December 31, 2015 Charged (credited) to the statement of earnings At December 31, 2016 OFFERING COSTS AND OTHER TOTAL (561) 110 (451) (244) (695) (561) 110 (451) (244) (695) LINEN IN SERVICE PROPERTY, PLANT AND EQUIPMENT INTANGIBLE ASSETS AND GOODWILL TOTAL Deferred tax liabilities At January 1, 2015 Charged (credited) to the statement of earnings At December 31, 2015 Charged (credited) to the statement of earnings At December 31, 2016 2,411 512 2,923 76 2,999 1,796 636 2,432 786 3,218 1,319 (310) 5,526 838 1,009 6,364 (245) 617 764 6,981 54 WE ARE DEPENDABLE.1 5 . C O N T I N G E N C I E S A N D C O M M I T M E N T S A. Contingencies – Letters of Credit The Corporation has standby letters of credit issued as part of normal business operations in the amount of $1,650 (December 31, 2015 – $1,650) which will remain outstanding for an indefinite period of time. B. Commitments i. Operating leases and utility commitments At December 31, 2016, the Corporation was committed to minimum lease payments for operating leases on buildings and equipment and estimated natural gas and electricity commitments for the next five calendar years and thereafter are as follows: OPERATING LEASE COMMITMENTS UTILITY LEASE COMMITMENTS 2017 2018 2019 2020 2021 Subsequent Total 5,236 5,321 4,938 4,637 4,114 31,161 55,407 2017 2018 2019 2020 2021 Subsequent Total 2,078 1,794 1,287 1,288 1,274 - 7,721 ii. Linen purchase commitments At December 31, 2016, the Corporation was committed to linen expenditure obligations in the amount of $6,926 (December 31, 2015 – $5,254) to be incurred within the next year. iii. Property, plant and equipment commitments At December 31, 2016, the Corporation was committed to capital expenditure obligations in the amount of $28,897 (December 31, 2015 – $3,675) to be incurred within the next year and $8,628 (December 31, 2015 – $0) to be incurred in the next two years. 1 6 . S H A R E C A P I T A L A. Authorized The Corporation is authorized to issue an unlimited number of common shares and such number of shares of one class designated as preferred shares which number shall not exceed 1/3 of the common shares issued and outstanding from time to time. B. Issued Balance, beginning of year Common shares issued under LTI Balance, end of year 2016 2015 7,985,713 7,959,735 37,767 25,978 8,023,480 7,985,713 Unvested common shares held in trust for LTI 44,634 39,716 55 2016 ANNUAL REPORT1 7 . E A R N I N G S P E R S H A R E A. Basic Basic earnings per share is calculated by dividing the net earnings attributable to equity holders of the Corporation by the weighted average number of ordinary shares in issue during the year. Net earnings Weighted average number of shares outstanding (thousands) Net earnings per share, basic 2016 11,527 7,955 1.45 2015 12,068 7,921 1.52 The basic net earnings per share calculation excludes the unvested Common shares held by the LTIP Trust. B. Diluted Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares to assume conversion of all dilutive potential ordinary shares. Basic weighted average shares for the year Dilutive effect of LTI shares Diluted weighted average shares for the year Net earnings Weighted average number of shares outstanding (thousands) Net earnings per share, diluted 1 8 . L O N G -T E R M I N C E N T I V E P L A N 2016 2015 7,955,026 31,703 7,986,729 11,527 7,987 1.44 7,920,609 9,883 7,930,492 12,068 7,930 1.52 A trust was formed to hold equity grants issued under the terms of the LTI on behalf of the participants (the “LTIP Trust”). The Corporation is neither a trustee of the LTIP Trust nor a direct participant of the LTI; however, under certain circumstances the Corporation may be the beneficiary of forfeited Common shares held by the LTIP Trust. The Corporation has control over the LTIP Trust as it is exposed, or has rights, to variable returns and has the ability to affect those returns through its power over the LTIP Trust. Therefore the Corporation has consolidated the LTIP Trust. Compensation expense is recorded by the Corporation in the period earned. Dividends paid by the Corporation with respect to unvested Common shares held by the LTIP Trust are paid to LTI participants. Unvested Common shares held by the LTIP Trust are shown as a reduction of shareholders’ equity. The cost of the 44,634 (2015 – 39,716) unvested Common shares held by the LTIP Trust at December 31, 2016 was nil (2015 - nil). Balance, beginning of year Issued during year Cancelled during year Vested during year Balance, end of year 2016 2015 UNVESTED VESTED UNVESTED VESTED 39,716 26,336 - (21,418) 44,634 343,109 11,431 - 21,418 375,958 45,368 18,298 - (23,950) 39,716 311,479 7,680 - 23,950 343,109 56 WE ARE DEPENDABLE. 1 9 . D I V I D E N D S T O S H A R E H O L D E R S During the year ended December 31, 2016, the Corporation declared total dividends to shareholders of $9,613 or $1.200 per share (2015 - $9,570 or $1.200 per share). The Corporation’s policy is to pay dividends to Shareholders of its available cash to the maximum extent possible consistent with good business practice considering requirements for capital expenditures, working capital, growth capital and other reserves considered advisable by the Directors of the Corporation. All such dividends are discretionary. Dividends are declared payable each month to the Shareholders on the last business day of each month and are paid by the 15th day of the following month. 2 0 . N E T C H A N G E I N N O N - C A S H W O R K I N G C A P I T A L I T E M S YEARS ENDED DECEMBER 31 2016 2015 Accounts receivable Linen in service Prepaid expenses and deposits Accounts payable and accrued liabilities Income taxes payable Total (1,296) (232) (411) 340 405 (1,194) (2,595) (1,485) (52) (2,137) (52) (6,321) 1 Accounts payable and accrued liabilities exclude the net change in non-cash amounts related to the acquisition of property, plant and equipment that have been committed to but not yet paid of $3,905 (2015 - $5,626). 2 1 . F I N A N C I A L I N S T R U M E N T S A. Fair Value The Corporation’s financial instruments at December 31, 2015 consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, dividends payable and long-term debt. The carrying value of accounts receivable, accounts payable and accrued liabilities, and dividends payable to Shareholders approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair value of the Corporation’s interest bearing debt approximates the respective carrying amount due to the floating rate nature of the debt. B. Financial Risk Management The Corporation’s activities are exposed to a variety of financial risks: price risk, credit risk and liquidity risk. The Corporation’s overall risk management program focuses on the unpredictability of financial and economic markets and seeks to minimize potential adverse effects on the Corporation’s financial performance. Risk management is carried out by financial management in conjunction with overall corporate governance. C. Price Risk i. Currency risk Foreign currency risk arises from the fluctuations in foreign exchange rates and the degree of volatility of these rates relative to the Canadian dollar. The Corporation is not significantly exposed to foreign currency risk as all revenues are received in Canadian dollars and minimal expenses are incurred in foreign currencies. For large capital expenditure commitments denominated in a foreign currency, the Corporation will enter into foreign exchange forward contracts if considered prudent to mitigate this risk. Based on the net liability at year end, the sensitivity to a 100 basis point movement in US to CAD currency rates would result in an impact of $68 to the net balance. ii. Interest rate risk The Corporation is subject to interest rate risk as its credit facility bears interest at rates that depend on certain financial ratios of the Corporation and vary in accordance with market interest rates. Based on the credit facility at year end, the sensitivity to a 100 basis point movement in interest rates would result in an impact of $258 to the net balance. 57 2016 ANNUAL REPORT iii. Other price risk The Corporation’s exposure to other price risk is limited since there are no significant financial instruments which fluctuate as a result of changes in market prices. D. Credit Risk The Corporation’s financial assets that are exposed to credit risk consist of accounts receivable. The Corporation, in the normal course of business, is exposed to credit risk from its customers. The allowance for doubtful accounts and past due receivables are reviewed by management at each balance sheet reporting date. Any amounts greater than 60 days are reviewed for impairment on a specific identification basis and have been fully accounted for as at December 31, 2016. The Corporation updates its estimate of the allowance for doubtful accounts based on the evaluation of the recoverability of accounts receivable balances of each customer taking into account historic collection trends, the contractual relationship with the customer and the nature of the customer which in many cases is a publicly funded health care entity. Management believes that the risks associated with concentrations of credit risk with respect to accounts receivable are limited due to the nature of the customers and the generally short payment terms. The aging of the Corporation’s receivables and related allowance for doubtful accounts are: December 31, 2015 Current 31-60 days Greater than 60 days Total December 31, 2016 Current 31-60 days Greater than 60 days Total GROSS ALLOWANCE NET 12,861 3,875 449 17,185 15,470 2,730 282 18,482 - - 30 30 - - 31 31 12,861 3,875 419 17,155 15,470 2,730 251 18,451 While the Corporation evaluates a customer’s credit worthiness before credit is extended, provisions for potential credit losses are also maintained. The change in allowance for doubtful accounts was as follows: Balance, beginning of year Adjustments made during the year Write-offs Balance, end of year 2016 2015 30 1 - 31 31 (1) - 30 58 WE ARE DEPENDABLE.E. Liquidity Risk The Corporation’s accounts payable and dividend payable are due within one year. Payments due under contractual obligations for the next five years and thereafter are as follows: PAYMENTS DUE BY PERIOD TOTAL < 1 YEAR 1-3 YEARS 4-5 YEARS > 5 YEARS Long-term debt Operating lease commitments Utility commitments Linen purchase obligations Property, plant and equipment commitments 25,800 55,407 7,721 6,926 37,525 - 5,236 2,078 6,926 28,897 25,800 10,259 3,081 - 8,628 - 8,751 2,562 - - - 31,161 - - - The Corporation has a credit facility with a maturity date of July 31, 2020 (Note 11). The degree to which the Corporation is leveraged may reduce its ability to obtain additional financing for working capital and to finance investments to maintain and grow the current levels of cash flows from operations. The Corporation may be unable to extend the maturity date of the credit facility. Management, to reduce liquidity risk, has historically renewed the terms of the credit facility in advance of its maturity dates and the Corporation has maintained financial ratios that management believes are conservative compared to financial covenants applicable to the credit facility. A significant portion of the available facility remains undrawn. Management measures liquidity risk through comparisons of current financial ratios with financial covenants contained in the credit facility. 2 2 . C A P I T A L M A N A G E M E N T The Corporation views its capital resources as the aggregate of its debt, shareholders’ equity and amounts available under its credit facility. In general, the overall capital of the Corporation is evaluated and determined in the context of its financial objectives and its strategic plan. The Corporation’s objective in managing capital is to ensure sufficient liquidity to pursue its growth and expansion strategy, while taking a conservative approach towards financial leverage and management of financial risk. The Corporation’s capital is composed of shareholders’ equity and long-term debt. The Corporation’s primary uses of capital are to finance its growth strategies and capital expenditure programs. The Corporation currently funds these requirements from internally generated cash flows and interest bearing debt. The Corporation pays a dividend which reduces its ability to internally finance growth and expansion. However the availability of the Corporation’s revolving line of credit provides sufficient access to capital to allow K-Bro to take advantage of acquisition opportunities. The merits of the dividend are periodically evaluated by the Board. The primary measures used by the Corporation to monitor its financial leverage are the ratios of Funded Debt to EBITDA (earnings before income taxes, depreciation and amortization) and Fixed Charge Coverage. EBITDA is an additional GAAP measure as prescribed by IFRS and has been presented in the manner in which the chief operating decision maker assesses performance. 59 2016 ANNUAL REPORTThe Corporation manages a Funded Debt to EBITDA ratio calculated as follows: Long-term debt, including current portion Issued and outstanding letters of credit Funded debt 2016 25,800 1,650 27,450 2015 2,349 1,650 3,999 Net earnings for the trailing twelve months 11,527 12,068 Add: Income tax expense Finance expense Depreciation of property, plant and equipment Amortization of intangible assets Loss on disposal of property, plant and equipment EBITDA Funded debt to EBITDA 4,840 739 9,235 1,790 105 28,236 0.97x 5,193 107 7,573 2,009 190 27,140 0.15x The Corporation manages a Fixed Charge Coverage calculated on a trailing twelve-month basis as follows: EBITDA Finance expense Dividends to shareholders Total Fixed charged coverage 2016 2015 28,236 27,140 739 9,613 10,352 2.7x 107 9,570 9,677 2.8x 23. REL ATE D PART Y TRA NS ACTIO NS individuals The Corporation from transacts with key management and with the Board who have authority and responsibility to plan, direct and control the activities of the Corporation. The nature of these dealings were in the form of payments for services rendered in their capacity as Directors (retainers and meeting fees, including share-based payments) and as employees of the Corporation (salaries, benefits, short- term bonuses and share-based payments). Key management personnel are defined as the executive officers of the Corporation including the President and Chief Executive Officer, Senior Vice-President and General Manager, Vice-President and Chief Financial Officer and three employees acting in the capacity of Vice-President and General Manager. During 2016 and 2015, remuneration to directors and key management personnel was as follows: 60 WE ARE DEPENDABLE.Salaries and retainer fees Short-term bonus incentives Post-employment benefits Share-based payments Total 2016 1,887 1,080 57 1,379 4,403 2015 1,814 885 55 1,156 3,910 The Corporation incurred expenses in the normal course of business for advisory consulting services provided by a Director. The amounts charged are included as salaries and retainer fees. For the year ended December 31, 2016, the Corporation incurred such fees totaling $138 (2015– $138). 2 4 . E X P E N S E S B Y N A T U R E Wages and benefits Linen Utilities Delivery Materials and supplies Occupancy costs Repairs and maintenance Other expenses Total 2016 77,154 17,547 9,776 8,793 6,083 5,505 4,855 1,140 2015 69,796 15,041 8,788 7,001 5,581 5,375 4,597 1,218 130,853 117,397 2 4 . S E G M E N T E D I N F O R M A T I O N The Chief Executive Officer is the corporation’s chief operating decision-maker. Management has determined the operating segments based on information reviewed by the Chief Executive Officer for the purposes of allocating resources and assessing performance. The Corporation provides laundry and linen services to the healthcare and hospitality sectors through nine operating divisions located in Vancouver, Victoria, Calgary, Edmonton, Regina, Toronto, Montréal, and Québec City. Management has assessed that the services offered and the economic characteristics associated with these divisions are similar, and therefore they have been aggregated into one reportable segment which operates exclusively in Canada. The aggregation assessment requires significant judgment by management. Economic indicators used by management to assess the economic characteristics are the gross margin and the growth rate of each division. In Edmonton, the Corporation is the significant supplier of laundry and linen services to the entity which manages all major healthcare facilities in the region and this contract expires on March 31, 2023. In Calgary, the major customer is contractually committed to February 28, 2018, in Vancouver the major customer is contractually committed to March 1, 2027, and in Saskatchewan the major customer is contractually committed to June 1, 2025. For the Years ended December 31, 2016, from these four major customers the Corporation has recorded revenue of $87,286 (2015 – $74,570), representing 54.9% (2015 – 51.6%) of total revenue. 61 2016 ANNUAL REPORT2016 2015 Healthcare Hospitality Total 111,384 47,705 70.0% 30.0% 98,940 45,597 68.5% 31.5% 159,089 100.0% 144,537 100.0% 2 6 . S U B S E Q U E N T E V E N T S A. Dividends The Corporation’s Board of Directors declared an eligible dividend of $0.10 per Common share of the Corporation payable on each of February 15, March 15 and April 13, 2017 to Shareholders of record on January 31, February 28, and March 31, 2017 respectively. B. Additional Toronto Healthcare Contract On February 28, 2017 the Corporation was awarded a 5 year contract to provide laundry and linen services to St. Michaels Hospital. The contract contains two renewal options for an additional 2 years. The contract extends the existing relationship between the Corporation and St. Michael’s Hospital and is a result of a competitive RFP process. On March 24, 2017 the Corporation was awarded a contract to provide laundry and linen services to Trillium Health Partners. The new contract is for 7 years with renewal options for an additional 8 years, and is a result of a competitive RFP process. “ A T K - B R O , W E I N N O V A T E A N D D E V E L O P N E W P R O C E S S E S A N D S Y S T E M S , A N D F U R T H E R R E F I N E B U S I N E S S D E L I V E R Y A N D P R A C T I C E S .” 62 WE ARE DEPENDABLE.C O R P O R A T E I N F O R M A T I O N B O A R D O F D I R E C T O R S ROSS SMITH, FCPA, FCA (CHAIR) Corporate Director MATTHEW HILLS, MBA Managing Director LLM Capital Partners STEVEN MATYAS, BSC President, North American Retail for Staples Inc. LINDA MCCURDY, MBA President & CEO K-Bro Linen Systems Inc. MICHAEL PERCY, PHD Professor, School of Business University of Alberta E X E C U T I V E O F F I C E R S LINDA MCCURDY, MBA President & CEO SEAN CURTIS, Senior VP & GM (Edmonton) KRISTIE PLAQUIN, CPA, CA Chief Financial Officer L O C A T I O N S CORPORATE OFFICE 14903 - 137 AVENUE EDMONTON, AB T5V 1R9 P 780 453 5218 F 780 455 6676 VICTORIA 861 VAN ISLE WAY VICTORIA, BC V9B 5R8 P 250 474 5699 F 250 474 5680 VANCOUVER 1 8035 ENTERPRISE STREET BURNABY, BC V5A 1V5 P 604 420 2203 F 604 420 2313 VANCOUVER 2 4590 CANADA WAY BURNABY, BC V5G 1J6 P 604 681 3291 F 604 685 1458 CALGARY 6969 – 55 STREET SE CALGARY, AB T2C 4Y9 P 403 724 9001 F 403 720 2959 Kevin Stephenson General Manager Kevin McElgunn General Manager Ryo Utahara General Manager Jeff Gannon General Manager Steve Cummings Plant Manager Peter Papagianeas Operations Manager John Truong Operations Manager Andrew Mackeen Operations Manager EDMONTON 15223 – 121 A AVENUE EDMONTON, AB T5V 1N1 P 780 451 3131 F 780 452 2838 REGINA 730 DETHRIDGE BAY REGINA, SK S4N 6H9 P 306 757 5276 F 306 757 5280 TORONTO 6045 FREEMONT BLVD MISSISSAUGA, ON L5R 4J3 P 416 233 5555 F 416 233 4434 Sean Curtis Senior Vice-President & General Manager Trevor Rye Operations Manager Sean Jackson General Manager Jerry Ostrzyzek General Manager Johan Sellarajah Operations Manager QUÉBEC 367 BOULEVARD DES CHUTES, QUÉBEC CITY QC G1E 3G1 P 418 661 6163 F 418 661 4000 Jessica Lévesque Directeur Général Fabien Poirier Directeur Opérations MONTRÉAL 599, RUE SIMONDS SUD GRANBY, QC J2J 1C1 P 450 378 3187 F 450 378 8245 Sylvain Tremblay Directeur Général TRANSFER AGENT & REGISTRAR AUDITORS LEGAL COUNSEL PRINCIPAL BANK STOCK EXCHANGE LISTING CST Trust Company Calgary, Alberta PricewaterhouseCoopers LLP Edmonton, Alberta Stikeman Elliott Toronto, Ontario TD Bank Edmonton, Alberta TSX: KBL McLennan Ross LLP Edmonton, Alberta 63 2016 ANNUAL REPORTN O T I C E O F A N N U A L M E E T I N G THE ANNUAL MEETING OF SHAREHOLDERS WILL BE HELD AT THE OFFICES OF STIKEMAN ELLIOTT LLP, VANCOUVER & MONTREAL BOARDROOMS, 5300 COMMERCE COURT WEST, 199 BAY STREET, TORONTO, ONTARIO ON WEDNESDAY, JUNE 14, 2017 AT 9:00 A.M. EDT INQUIRIES@K-BROLINEN.COM K-BROLINEN.COM 64 WE ARE DEPENDABLE.INQUIRIES@K-BROLINEN.COM K-BROLINEN.COM 

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